ex101purchaseagmt.htm


    Exhibit 10.1

    
 

    SECURITIES
PURCHASE AGREEMENT

     

    SECURITIES PURCHASE AGREEMENT
(this “Agreement”),
dated as of August 1, 2008, by and among Aeolus Pharmaceuticals, Inc., a
Delaware corporation with its headquarters located at 23811 Inverness Place,
Laguna Niguel, California  92677, as issuer (the “Company”), and the investors
listed on the Schedule of Buyers attached hereto (individually, a “Buyer” and collectively, the
“Buyers”).

     

    WHEREAS:

     

    A.           The
Company and each Buyer is executing and delivering this Agreement in reliance
upon the exemption from securities registration afforded by Section 4(2) of the
Securities Act of 1933, as amended (the “1933 Act”), and Rule 506 of
Regulation D (“Regulation D”) as
promulgated by the United States Securities and Exchange Commission (the “SEC”) under the 1933
Act.

     

    B.           The
Company has authorized the issuance of a new series of unsecured senior
convertible notes of the Company, in the form attached hereto as Exhibit A (the “Notes”), which Notes shall be
convertible into shares (as converted, the “Conversion Shares”) of the
Company’s common stock, par value $0.01 per share (the “Common Stock”), in accordance
with the terms of the Notes, at an initial conversion price, with respect to the
Notes issued on the Initial Closing Date (as defined below) and pursuant to
Section 1(b) below, of $0.35 per share, and with respect to the Notes
issued in accordance with Section 1(c) below, equal to the TACP (as defined
in Exhibit A
hereto) per share.

     

    C.           The
Company has authorized the issuance of a new series of Warrants to purchase
shares of Common Stock, in the form attached hereto as Exhibit B (the “Warrants”), which Warrants
shall be exercisable for shares of Common Stock (as exercised, the “Warrant Shares”) in accordance
with the terms of the Warrants, at an initial exercise price of $0.50 per
share.

     

    D.           Each
Buyer wishes to purchase, and the Company wishes to sell, upon the terms and
conditions stated in this Agreement, (i) that principal amount of Notes set
forth opposite such Buyer’s name in column (3) on the Schedule of Buyers
attached hereto (the aggregate principal amount of the Notes issued on the
Initial Closing Date and pursuant to Section 1(b) below for all Buyers
shall be $1,000,000) and (ii) Warrants to acquire up to that number of Warrant
Shares set forth opposite such Buyer’s name in column (4) of the Schedule of
Buyers attached hereto (the aggregate number of Warrant Shares underlying the
Warrants issued on the Initial Closing Date and pursuant to Section 1(b)
below for all Buyers shall be 2,000,000), subject to adjustment as provided for
in the Warrant.

     

    E.           The
Company wishes to offer to Buyers the option to buy, collectively, up to
$4,000,000 in aggregate principal amount of additional Notes together with
Warrants to acquire up to an aggregate of 8,000,000 additional Warrant Shares,
subject to adjustment as provided for in the Warrant, in accordance with the
terms and conditions of Section 1(c) below.

     


    
      
        
           

        

         


      

      
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    F.           The
Notes, the Conversion Shares, the Warrants and the Warrant Shares collectively
are referred to herein as the “Securities”.  “Unit” shall refer to
(i) a $1,000 in principal amount of Notes and (ii) Warrants, issued
concurrently with the issuance of Notes to a Buyer of Notes referred to in
clause (i), to purchase up to 2,000 Warrants Shares, subject to adjustment
as provided for in the Warrant.

     

    NOW, THEREFORE, the Company
and each Buyer hereby agree as follows:

     

    1.           PURCHASE AND SALE OF NOTES
AND WARRANTS.

     

    (a)           Purchase and Sale of Notes
and Warrants on the Initial Closing Date.

     

    (i)           Initial Notes and
Warrants. Subject to the
satisfaction (or waiver) of the conditions set forth in Sections 6 and 7(a)
below, the Company shall issue and sell to each Buyer, and each Buyer severally,
but not jointly, shall purchase from the Company, (x) a principal amount of
Notes equal to the product of the principal amount of Notes as is set forth
opposite such Buyer’s name in column (3) on the Schedule of Buyers multiplied by 50%,
and (y) Warrants to acquire up to that number of Warrant Shares equal to the
product of the number of Warrant Shares as is set forth opposite such Buyer’s
name in column (4) on the Schedule of Buyers multiplied by 50%
(the “Initial
Closing”).

     

    (ii)           Initial
Closing.  The date and time of the Initial Closing (the “Initial Closing Date”) shall
be 10:00 a.m., New York City time, on the date hereof (or such later date as is
mutually agreed to by the Company and each Buyer) after notification of
satisfaction (or waiver) of the conditions to the Initial Closing set forth in
Sections 6 and 7(a) below at the offices of Lowenstein Sandler PC, 1251 Avenue
of the Americas, 18th Floor, New York, New York 10020.

     

    (iii)           Initial Purchase
Price.  The aggregate purchase price for the Notes and the
Warrants to be purchased by each Buyer at the Initial Closing (the “Initial Purchase Price”) shall
equal the product of the amount set forth opposite each such Buyer’s name in
column (3) of the Schedule of Buyers multiplied by
50%.  Each Buyer shall pay $1,000 for each $1,000 of principal amount
of Notes and related Warrants to be purchased by such Buyer at the Initial
Closing.

     

    (b)           Purchase and Sale of
Additional Notes and Warrants on each Subsequent Closing
Date.

     

    (i)           Subsequent Notes and
Warrants. On
the one (1) month anniversary of the Initial Closing Date and on the same day of
each month thereafter through and including the four month anniversary of the
Initial Closing Date (or if such day is not a Business Day (as defined in
Section 4(e)), then on the first Business Day immediately thereafter),
subject to the satisfaction (or waiver) of the conditions set forth in Sections
6 and 7(b) below, the Company shall issue and sell to each Buyer, and each Buyer
severally, but not jointly, shall purchase from the Company on the Subsequent
Closing Date (as defined below), (x) a principal amount of Notes equal to the
product of the principal amount of Notes as is set forth opposite such Buyer’s
name in column (3) on the Schedule of Buyers multiplied by 12.5%,
and (y) Warrants to acquire up to that number of Warrant Shares equal to
the product of the number

     


    
      
        
           

        

         


      

      
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    of
Warrant Shares as is set forth opposite such Buyer’s name in column (4) on the
Schedule of Buyers multiplied by 12.5%
(each, a “Subsequent
Closing”).

     

    (ii)           Subsequent
Closings.  The date and time of each
Subsequent  Closing (each, a “Subsequent Closing Date”)
shall be 10:00 a.m., New York City time, on the date set forth in
Section 1(b)(i) above for each Subsequent Closing (or such later date as is
mutually agreed to by the Company and each Buyer) after notification of
satisfaction (or waiver) of the conditions to such Subsequent Closing set forth
in Sections 6 and 7(b) below at the offices of Lowenstein Sandler PC, 1251
Avenue of the Americas, 18th Floor, New York, New York 10020.

     

    (iii)           Subsequent Closing Purchase
Price.  The aggregate purchase price for the Notes and the
Warrants to be purchased by each Buyer at each Subsequent Closing (each a “Subsequent Closing Purchase
Price”) shall equal the product of the amount set forth opposite each
such Buyer’s name in column (3) of the Schedule of Buyers multiplied by
12.5%.  Each Buyer shall pay $1,000 for each $1,000 of principal
amount of Notes and related Warrants to be purchased by such Buyer at each
Subsequent Closing.

     

    (c)           Purchase and Sale of Notes
and Warrants upon Election of Buyers .

     

    (i)           Election to Purchase
Additional Units. At any time, and from
time to time, on or prior to the eighteen (18) month anniversary of the Initial
Closing Date (the “Election
Termination Date”; provided if such day is not a Business Day, then the
Election Termination Date shall be the first Business Day immediately
thereafter), each Buyer wishing to exercise its option to purchase additional
Units shall by written notice (each an “Election Notice”) to the
Company indicate (x) the maximum amount of Units it wishes to purchase from
the Company at a purchase price of $1,000 per Unit, and (y) the Business
Day on which it wishes for such Election Closing (as defined below), provided
that the closing date for such Election Closing shall be not less than five (5)
Business Days nor greater than twenty (20) Business Days after the receipt of
such Election Notice by the Company (each such closing date, an “Election Closing Date”, and
each of the Initial Closing Date, a Subsequent Closing Date and an Election
Closing Date, a “Closing
Date”).  No Election Notice may be delivered less than five (5)
Business Days before the Election Termination Date.  On each Election
Closing Date, the Buyer shall purchase the lesser of (x) the number of
Units included in its Election Notice or (y)(i) the product of its Pro Rata
Share (as defined below) multiplied by the
4,000 Units offered by the Company under this Section 1(c) less (ii) the
amount of Units it shall have purchased in connection with any other Election
Closing.  For the purposes of this Section 1(c), a Buyer’s “Pro Rata Share” means the
quotient of the principal amount of Notes purchased by such Buyer at the Initial
Closing divided
by the aggregate principal amount of all Notes purchased by Buyers at the
Initial Closing.

     

    (ii)           Over-Allotment
Option. To
the extent that any Buyer does not elect to purchase its Pro Rata Share of Units
on or prior to the Election Termination Date, then Buyers who wish to purchase
more than their Pro Rata Share of Units shall deliver to the Company at least
five (5) Business Days prior to the Election Termination Date an Election Notice
to purchase Units on the Election Termination Date and the maximum dollar amount
of Units it wishes to purchase on such date.  On or prior to the third
Business Day prior to the

     


    
      
        
           

        

         


      

      
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    Election
Termination Date, the Company shall determine from all the applicable Election
Notices received the maximum amount of Units that all Buyers collectively wish
to purchase on the Election Closing Date in excess of their Pro Rata Share of
Units and the amount of Units each such Buyer may Purchase in excess of its Pro
Rata Share (such amount of Units, the “Over-Allotment Amount”), and
shall deliver written notice to each such Buyer specifying the total amount of
Units to be purchased by each Buyer at the corresponding Election Closing on the
Election Termination Date, and setting forth the Over-Allotment Amount of Units
to be purchased by each such Buyer.  The Over-Allotment Amount shall
be determined by (x) subtracting from 4,000 the amount of Units elected to
be purchased by each Buyer pursuant to this Section 1(c) up to such Buyer’s
Pro Rata Amount, and (y) multiplying that difference by the Pro Rata Share
of each Buyer electing to purchase Units in excess of its Pro Rata Share of
Units, except that the denominator in such calculation shall only include each
Buyer electing to purchase Units in excess of its Pro Rata Share of Units,
provided that the a Buyer shall not be required to purchase an amount
of  Units in excess of the maximum number of Units set forth in its
corresponding Election Notice (and to the extent any Units are left over after
such calculation, such calculation is to be re-run only including Buyers
electing to purchase in excess of their Pro Rata Share of Units for which their
respective Over-Allotment Amounts in the prior calculation do not exceed the
maximum numbers of Units to be purchased set forth in their corresponding
Election Notices).

     

    (iii)           Election
Closings. Subject to the
satisfaction (or waiver) of the conditions set forth in Sections 6 and 7(c)
below, the Company shall issue and sell to each Buyer delivering an applicable
Election Notice, and each Buyer delivering such Election Notice severally, but
not jointly, shall purchase from the Company on the applicable Election Closing
Date, the number of Units to be issued to such Buyer in accordance with
clauses (i) and (ii) above of this Section 1(c) (each an “Election Closing” and, each of
the Initial Closing, a Subsequent Closing and an Election Closing, a “Closing”).

     

    (iv)           Election
Closings.  The date and time of each Election Closing shall be
10:00 a.m., New York City time, on the applicable Election Closing Date (or such
later date as is mutually agreed to by the Company and the Buyer delivering the
applicable Election Notice) after notification of satisfaction (or waiver) of
the conditions to such Election Closing set forth in Sections 6 and 7(c) below
at the offices of Lowenstein Sandler PC, 1251 Avenue of the Americas, 18th
Floor, New York, New York 10020.

     

    (v)           Election Closing Purchase
Price.  The aggregate purchase price for the Notes and the
Warrants to be purchased by each Buyer delivering an Election Notice at each
corresponding Election Closing (each an “Election Closing Purchase
Price”, and, each of the Initial Closing Purchase Price, a Subsequent
Closing Purchase Price and an Election Closing Purchase Price, a “Purchase Price”)) shall equal
the product of $1,000 multiplied by the
number of Units to be purchased by such Buyer at the corresponding Election
Closing.

     

    (d)           Form of
Payment.  On each Closing Date, (i) each Buyer shall pay its
applicable Purchase Price to the Company for the Notes and the Warrants to be
issued and sold to such Buyer at such Closing, by wire transfer of immediately
available funds in accordance with the Company’s written wire instructions and
(ii) the Company shall deliver to each Buyer the Notes (allocated in the
principal amounts as such Buyer shall request) and the Warrants

     


    
      
        
           

        

         


      

      
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    (allocated
in the amounts as such Buyer shall request), with respect to the Initial
Closing, in accordance with Section 1(a) above, and with respect to each
Election Closing, representing the principal amount of Notes and the amount of
Warrant Shares underlying the Warrants which such Buyer is then purchasing in
accordance with Section 1(c) above, in each case duly executed on behalf of
the Company and registered in the name of such Buyer or its
designee.

     

    2.           BUYER’S REPRESENTATIONS AND
WARRANTIES.  Each Buyer, severally and not jointly, represents
and warrants to the Company that:

     

    (a)           No Sale or
Distribution.  Such Buyer is acquiring the Notes, and the
Warrants, and upon conversion of the Notes and exercise of the Warrants (other
than pursuant to a Cashless Exercise (as defined in the Warrants)) will acquire
the Conversion Shares issuable upon conversion of the Notes and the Warrant
Shares issuable upon exercise of the Warrants, for its own account, not as
nominee or agent, and not with a view towards resale or distribution thereof,
except pursuant to sales registered or exempted under the 1933 Act, and such
Buyer has no present intention of selling, granting any participation in, or
otherwise distributing
the same in violation of the 1933 Act; provided, however, that by making the
representations herein, such Buyer does not agree to hold any of the Securities
for any minimum or other specific term and reserves the right to dispose of the
Securities at any time in accordance with or pursuant to a registration
statement or an exemption under the 1933 Act and pursuant to the applicable
terms of the Transaction Documents (as defined in Section 3(b)).  Such
Buyer is acquiring the Securities hereunder in the ordinary course of its
business.  Such Buyer does not presently have any agreement or
understanding, directly or indirectly, with any Person (as defined in Section
3(r) below) to distribute any of the Securities.

     

    (b)           Accredited Investor
Status.  Such Buyer is an “accredited investor” as that term is
defined in Rule 501(a) of Regulation D.

     

    (c)           Reliance on
Exemptions.  Such Buyer understands that the Securities are
being offered and sold to it in reliance on specific exemptions from the
registration requirements of United States federal and state securities laws and
that the Company is relying in part upon the truth and accuracy of, and such
Buyer’s compliance with, the representations, warranties, agreements,
acknowledgments and understandings of such Buyer set forth herein in order to
determine the availability of such exemptions and the eligibility of such Buyer
to acquire the Securities.

     

    (d)           Information.  Such
Buyer has been furnished with all materials relating to the business, finances
and operations of the Company and materials relating to the offer and sale of
the Securities that have been requested by such Buyer.  Such Buyer and
its advisors, if any, have been afforded the opportunity to ask questions of and
receive answers from the Company regarding the Company, its business and the
terms and conditions of the offering of the Securities.  Such Buyer
acknowledges that it has had access to the SEC Documents (as defined in Section
3(j) below) via the SEC’s Electronic Data Gathering and Retrieval System (“EDGAR”).  Neither
such inquiries nor any other due diligence investigations conducted by such
Buyer or its advisors, if any, or its representatives shall modify, amend or
affect such Buyer’s right to rely on the Company’s representations and
warranties contained herein.  Such

     


    
      
        
           

        

         


      

      
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    Buyer
understands and acknowledges that (i) its investment in the Securities involves
a high degree of risk, (ii) it is able to afford a complete loss of such
investment in the Securities, and (iii) it has such knowledge and experience in
financial and business matters that it is capable of evaluating the merits and
risks of the investment contemplated hereby.  Such Buyer has sought
such accounting, legal and tax advice as it has considered necessary to make an
informed investment decision with respect to its acquisition of the
Securities.

     

    (e)           No Governmental
Review.  Such Buyer understands that no United States federal
or state agency or any other government or governmental agency has passed on or
made any recommendation or endorsement of the Securities or the fairness or
suitability of the investment in the Securities nor have such authorities passed
upon or endorsed the merits of the offering of the Securities.

     

    (f)           Transfer or
Resale.  Such Buyer understands that: (i) the Securities have
not been and are not being registered under the 1933 Act or any state securities
laws, and may not be offered for sale, sold, assigned or transferred unless (A)
subsequently registered thereunder, (B) such Buyer shall have delivered to the
Company an opinion of counsel, in a form reasonably acceptable to the Company,
to the effect that such Securities to be sold, assigned or transferred may be
sold, assigned or transferred pursuant to an exemption from such registration,
or (C) such Buyer provides the Company with reasonable assurance that such
Securities can be sold, assigned or transferred pursuant to Rule 144 or
Rule 144A promulgated under the 1933 Act, as amended (or a successor rule
thereto) (collectively, “Rule
144”); (ii) any sale of the Securities made in reliance on Rule 144 may
be made only in accordance with the terms of Rule 144 and further, if Rule 144
is not applicable, any resale of the Securities under circumstances in which the
seller (or the Person through whom the sale is made) may be deemed to be an
underwriter (as that term is defined in the 1933 Act) may require compliance
with some other exemption under the 1933 Act or the rules and regulations of the
SEC thereunder; and (iii) neither the Company nor any other Person is under any
obligation to register the Securities under the 1933 Act or any state securities
laws or to comply with the terms and conditions of any exemption
thereunder.  Additionally, without the written consent of the Company,
none of the Conversion Shares or the Warrant Shares may be assigned, pledged,
sold, transferred or otherwise conveyed by such Buyer prior to the eighteen (18)
month anniversary of the Initial Closing Date other than to another Buyer who
then holds Securities or to an “affiliate” of such Buyer (as defined in Rule 144
of the 1933 Act).  Notwithstanding the foregoing, the Securities may
be pledged in connection with a bona fide margin account or other loan or
financing arrangement secured by the Securities and such pledge of Securities
shall not be deemed to be a transfer, sale or assignment of the Securities
hereunder, and no Buyer effecting a pledge of Securities shall be required to
provide the Company with any notice thereof or otherwise make any delivery to
the Company pursuant to this Agreement or any other Transaction Document (as
defined in Section 3(b)), including, without limitation, this
Section 2(f).

     

    (g)           Legends.  Such
Buyer understands that the certificates or other instruments representing the
Notes and the Warrants and, until such time as the resale of the Conversion
Shares and the Warrant Shares have been registered under the 1933 Act or
eligible to be sold under Rule 144 of the 1933 Act without regard to the
availability of current financial information, the stock certificates
representing the Conversion Shares and the Warrant Shares, except as set forth
below, shall bear any legend as required by the “blue sky” laws of any
state

     


    
      
        
           

        

         


      

      
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    and a
restrictive legend in substantially the following form (and a stop-transfer
order may be placed against transfer of such stock certificates):

     

    [NEITHER THE ISSUANCE AND SALE
OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE NOR THE SECURITIES INTO WHICH
THESE SECURITIES ARE [CONVERTIBLE] [EXERCISABLE] HAVE BEEN][THE SECURITIES REPRESENTED
BY THIS CERTIFICATE HAVE NOT BEEN] REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES
LAWS.  THE SECURITIES MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED
OR ASSIGNED (I) IN THE ABSENCE OF (A) AN EFFECTIVE REGISTRATION STATEMENT FOR
THE SECURITIES UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR (B) AN OPINION
OF COUNSEL, IN A FORM REASONABLY ACCEPTABLE TO THE COMPANY, THAT REGISTRATION IS
NOT REQUIRED UNDER SAID ACT OR (II) UNLESS SOLD PURSUANT TO RULE 144 OR RULE
144A UNDER SAID ACT.  NOTWITHSTANDING THE FOREGOING, THE SECURITIES
MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN OR
FINANCING ARRANGEMENT SECURED BY THE SECURITIES.

     

    The
legend set forth above shall be removed and the Company shall issue a
certificate without such legend to the holder of the Securities upon which it is
stamped, if, unless otherwise required by state securities laws, (i) such
Securities are registered for resale under the 1933 Act, (ii) in connection with
a sale, assignment or other transfer, such holder provides the Company with an
opinion of a law firm reasonably acceptable to the Company, in a form reasonably
acceptable to the Company, to the effect that such sale, assignment or transfer
of the Securities may be made without registration under the applicable
requirements of the 1933 Act, or (iii) such holder provides the Company with
reasonable assurance that the Securities can be sold, assigned or transferred
pursuant to Rule 144 or Rule 144A.  The Company shall be obligated to
retain counsel in order to cause such counsel to deliver the legal opinion
referred to in clause (I)(B) of the legend set forth above and to pay any
related fees and expenses of said counsel.

     

    (h)           Validity;
Enforcement.  The execution, delivery and performance by such
Buyer of this Agreement have been duly and validly authorized, executed and
delivered on behalf of such Buyer and shall constitute the legal, valid and
binding obligations of such Buyer enforceable against such Buyer in accordance
with their respective terms, except (i) as may be limited by general principles
of equity or to applicable bankruptcy, insolvency, reorganization, moratorium,
liquidation and other similar laws relating to, or affecting generally, the
enforcement of applicable creditors’ rights generally, (ii) as limited by laws
relating to specific performance, injunctive relief of other equitable remedies,
and (iii) to the extent the indemnification provisions contained in this
Agreement may be limited by applicable laws.

     

    (i)           No
Conflicts.  The execution, delivery and performance by such
Buyer of this Agreement and the consummation by such Buyer of the transactions
contemplated hereby will not (i) result in a violation of the organizational
documents of such Buyer or (ii) conflict

     


    
      
        
           

        

         


      

      
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    with, or
constitute a default (or an event which with notice or lapse of time or both
would become a default) under, or give to others any rights of termination,
amendment, acceleration or cancellation of, any agreement, indenture or
instrument to which such Buyer is a party, or (iii) result in a violation of any
law, rule, regulation, order, judgment  or decree (including federal
and state securities laws) applicable to such Buyer, except in the case of
clauses (ii) and (iii) above, for such conflicts, defaults, rights or violations
which would not, individually or in the aggregate, reasonably be expected to
have a material adverse effect on the ability of such Buyer to perform its
obligations hereunder.

     

    (j)           Residency.  Such
Buyer is a resident of that jurisdiction specified below its address on the
Schedule of Buyers.

     

    (k)           Certain Trading
Activities.  Other than with respect to the transactions
contemplated herein, since the time that such Buyer was first contacted by the
Company or any other Person regarding this investment in the Company neither the
Buyer nor any “affiliate” of such Buyer (as defined in Rule 144 of the 1933 Act)
which (x) had knowledge of the transactions contemplated hereby, (y) has or
shares discretion relating to such Buyer’s investments or trading or information
concerning such Buyer’s investments and (z) is subject to such Buyer’s review or
input concerning such affiliate’s investments or trading (collectively, “Trading Affiliates”) has
directly or indirectly, nor has any Person acting on behalf of or pursuant to
any understanding with such Buyer or Trading Affiliate, effected or agreed to
effect any transactions in the securities of the Company.  Such Buyer
hereby covenants and agrees not to, and shall cause its Trading Affiliates not
to, engage, directly or indirectly, in any transactions in the securities of the
Company or involving the Company’s securities during the period from the date
hereof until such time as (i) the transactions contemplated by this Agreement
are first publicly announced as described in Section 4(h) hereof or (ii) this
Agreement is terminated in full pursuant to Section 8
hereof.  Notwithstanding the foregoing, for avoidance of doubt,
nothing contained herein shall constitute a representation or warranty, or
preclude any actions, with respect to the identification of the availability of,
or securing of, available shares to borrow in order to effect short sales or
similar transactions in the future.

     

    (l)           Legal
Investment.  Such Buyer acknowledges that the Company has not
provided any advice as to whether the Securities are a suitable investment or
whether the Securities constitute a legal investment for such
Buyer.

     

    (m)           Compliance with SEC
Telephone Interpretation.  Such Buyer acknowledges the SEC’s
position set forth in Item 65, Section 5 under Section A, of the Manual of
Publicly Available Telephone Interpretations, dated July 1997, compiled by the
Office of Chief Counsel, Division of Corporation Finance, and such Buyer will
adhere to such position.

     

    (n)           General
Solicitation.  Such Buyer is not purchasing the Notes and the
Warrants as a result of any advertisement, article, notice or other
communication regarding any of the Securities published in any newspaper,
magazine or similar media or broadcast over television or radio or presented at
any seminar.

     

    (o)           Organization.  Such
Buyer is an entity duly organized, validly existing and in good standing under
the laws of the jurisdiction of its organization with the requisite

     


    
      
        
           

        

         


      

      
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    corporate,
limited liability company or partnership power and authority to enter into and
to consummate the transactions contemplated by this Agreement and the other
applicable Transaction Documents (as defined below) and otherwise to carry out
its obligations hereunder and thereunder.

     

    (p)           Acknowledgement Regarding
Insolvency.  Notwithstanding anything in this Agreement to the
contrary, each Buyer understands and acknowledges that the Company and its
Subsidiaries, individually and on a consolidated basis, as of the date hereof,
and after giving effect to the transactions contemplated hereby to occur at the
Initial Closing or at any Subsequent Closing or Election Closing, may be, or may
become, Insolvent (as defined below).  For purposes of this Section
2(p), “Insolvent” means,
with respect to any Person (as defined in Section 3(r)), (i) the present fair
saleable value of such Person’s assets is less than the amount required to pay
such Person’s total Indebtedness (as defined in Section 3(q)), (ii) such Person
is unable to pay its debts and liabilities, subordinated, contingent or
otherwise, as such debts and liabilities become absolute and matured, (iii) such
Person intends to incur or believes that it will incur debts that would be
beyond its ability to pay as such debts mature or (iv) such Person has
unreasonably small capital with which to conduct the business in which it is
engaged as such business is now conducted and is proposed to be
conducted.

     

    3.           REPRESENTATIONS AND
WARRANTIES OF THE COMPANY.  The Company represents and warrants
to each of the Buyers that, as of the date hereof, as of the Initial Closing
Date, except as set forth in any disclosure schedules hereto or as otherwise
described in the SEC Documents prior to the date hereof:

     

    (a)           Organization and
Qualification.  The Company and its “Subsidiaries” (which for
purposes of this Agreement means “Significant Subsidiary” as such term is
defined in Rule 1-02 of Regulation S-X of the 1933 Act; which as of the date of
this Agreement, is solely comprised of Aeolus Sciences, Inc., a Delaware
corporation and a wholly owned subsidiary of the Company), are entities duly
organized and validly existing and, to the extent legally applicable, in good
standing under the laws of the jurisdiction in which they are formed, and have
the requisite power and authorization to own their properties and to carry on
their business as now being conducted.  Each of the Company and its
Subsidiaries is duly qualified as a foreign entity to do business and to the
extent legally applicable, is in good standing in every jurisdiction in which
its ownership of property or the nature of the business conducted by it makes
such qualification necessary, except to the extent that the failure to be so
qualified or be in good standing would not reasonably be expected to have a
Material Adverse Effect.  As used in this Agreement, “Material Adverse Effect” means
any material adverse effect on the business, properties, assets, operations,
results of operations, condition (financial or otherwise) or prospects of the
Company and its Subsidiaries, taken as a whole, or on the transactions
contemplated hereby and the other Transaction Documents or by the agreements and
instruments to be entered into in connection herewith or therewith, or on the
authority or ability of the Company to perform its obligations under the
Transaction Documents (as defined below).  Notwithstanding the
foregoing, the entities in which the Company,
directly or indirectly, owns any of the capital stock or holds an equity or
similar interest which are not
Subsidiaries, taken as whole, do not have income, revenues or assets which are
material to the Company and its Subsidiaries, individually, or taken as a whole.
Except for the capital stock of Aeolus Sciences,

     


    
      
        
           

        

         


      

      
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    Inc. or
as set forth on Schedule 3(a), the
Company does not, directly or indirectly, own any joint venture or similar
entity or hold capital stock, equity or similar interests.

     

    (b)           Authorization; Enforcement;
Validity.  The Company has the requisite corporate power and
authority to enter into, deliver and perform its obligations under this
Agreement, the Notes, the Warrants, the Irrevocable Transfer Agent Instructions
(as defined in Section 5(b)) and each of the other agreements entered into by
the Company in connection with the transactions contemplated by this Agreement
(collectively, the “Transaction
Documents”), and to issue the Securities in accordance with the terms
hereof and thereof.  The execution and delivery of this Agreement and
the other Transaction Documents by the Company and the consummation by the
Company of the transactions contemplated hereby and thereby, including, without
limitation, the issuance of the Notes and the Warrants, the reservation for
issuance and the issuance of the Conversion Shares issuable upon conversion
of the Notes, and the reservation for issuance and issuance of Warrant Shares
issuable upon exercise of the Warrants, have been duly authorized by the
Company’s board of directors, and no further filing, consent, or authorization
is required by the Company, its board of directors or its
stockholders.  This Agreement and the other Transaction Documents of
even date herewith have been (and, to the extent the Initial Closing Date is
after the date hereof, each Transaction Document to be entered into as of the
Initial Closing Date will have been) duly executed and delivered by the Company
as of the Initial Closing Date, and constitute (or in the case of Transaction
Documents entered on the Initial Closing Date if such date is after the date
hereof, will constitute as of the Initial Closing Date) the legal, valid and
binding obligations of the Company, enforceable against the Company in
accordance with their respective terms, except (i) as may be limited by general
principles of equity or applicable bankruptcy, insolvency, reorganization,
moratorium, liquidation or similar laws relating to, or affecting generally, the
enforcement of applicable creditors’ rights generally, (ii) as limited by laws
relating to specific performance, injunctive relief of other equitable remedies,
and (iii) to the  extent the indemnification provisions contained in
this Agreement may be limited by applicable laws.

     

    (c)           Issuance of
Securities.  The issuance of the Notes and the Warrants are
duly authorized by the Company and upon issuance in accordance with the terms of
this Agreement shall be free from all taxes, liens and charges with respect to
the issue thereof.  A number of shares of Common Stock shall have been
duly authorized and reserved for issuance which equals or exceeds 110% of the
aggregate of the maximum number of shares of Common Stock issuable (i) upon
conversion of the Notes and (ii) upon exercise of the Warrants.  Upon
conversion or exercise in accordance with the Notes or the Warrants, as the case
may be, the Conversion Shares and the Warrant Shares, respectively, will be
validly issued, fully paid and nonassessable and free from all preemptive or
similar rights, taxes, liens and charges with respect to the issue thereof, with
the holders being entitled to all rights accorded to a holder of Common
Stock.  Assuming the accuracy of each of the representations and
warranties set forth in Section 2 of this Agreement, the offer and issuance
by the Company of the Securities is exempt from registration under the 1933
Act.

     

    (d)           No
Conflicts.  The execution, delivery and performance of this
Agreement and the other Transaction Documents by the Company and the
consummation by the Company of the transactions contemplated hereby and thereby
(including, without limitation, the issuance of the Notes and Warrants and
reservation for issuance and issuance of the Conversion Shares

     


    
      
        
           

        

         


      

      
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    and the
Warrant Shares) will not (i) result in a violation of any certificate of
incorporation, certificate of formation, any certificate of designations or
other constituent documents of the Company or any of its Subsidiaries, any
capital stock of the Company or any of its Subsidiaries or bylaws of the Company
or any of its Subsidiaries or (ii) conflict with, or constitute a default (or an
event which with notice or lapse of time or both would become a default) in any
respect under, or give to others any rights of termination, amendment,
acceleration or cancellation of, any agreement, indenture or instrument to which
the Company or any of its Subsidiaries is a party, or (iii) result in a
violation of any law, rule, regulation, order, judgment or decree (including
foreign, federal and state securities laws and regulations and the rules and
regulations of the OTC Bulletin Board (the “Principal Market”)) applicable
to the Company or any of its Subsidiaries or by which any property or asset of
the Company or any of its Subsidiaries is bound or affected, except in the case
of clauses (ii) and (iii) above, to the extent that such violation conflict,
default or right would not reasonably be expected to have a Material Adverse
Effect.

     

    (e)           Consents and
Filings.  Neither the Company nor any of its Subsidiaries is
required to obtain any consent, authorization or order of, or make any filing or
registration with, any court, governmental agency or any regulatory or
self-regulatory agency or any other Person in order to execute, deliver or
perform any of its obligations under or contemplated by the Transaction
Documents to which they are a party, in each case in accordance with the terms
hereof or thereof, other than (i) the filing of Form D with the SEC and such
filings as are required to be made under applicable state securities laws, (ii)
application(s) to the Principal Market for the listing of the Securities for
trading thereon in the time and manner required thereby, and
(iii)  filings required pursuant to Section 4(h) of this
Agreement.  The Company and its Subsidiaries are unaware of any facts
or circumstances that might prevent the Company from obtaining or effecting any
of the registration, application or filings pursuant to the preceding
sentence.  The Company is not in violation of the listing requirements
of the Principal Market and has no knowledge of any facts that would reasonably
lead to delisting or suspension of the Common Stock in the foreseeable
future.

     

    (f)           Acknowledgment Regarding
Buyer’s Purchase of Securities.  The Company acknowledges and
agrees that each Buyer is acting solely in the capacity of an arm’s length
purchaser with respect to the Transaction Documents and the transactions
contemplated hereby and thereby.

     

    (g)           No General
Solicitation.  Neither the Company, nor any of its Subsidiaries
or affiliates, nor any Person acting on its or their behalf, has engaged in any
form of general solicitation or general advertising (within the meaning of
Regulation D) in connection with the offer or sale of the
Securities.

     

    (h)           No Integrated
Offering.  None of the Company, its Subsidiaries, any of their
affiliates, and any Person acting on their behalf has, directly or indirectly,
made any offers or sales of any security or solicited any offers to buy any
security, under circumstances that would require registration of the issuance of
any of the Securities under the 1933 Act, whether through integration with prior
offerings or otherwise, or cause this offering of the Securities to require
approval of stockholders of the Company for purposes of any applicable
stockholder approval provisions, including, without limitation, under the rules
and regulations of any

     


    
      
        
           

        

         


      

      
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    exchange
or automated quotation system on which any of the securities of the Company are
listed or designated.

     

    (i)           Application of Takeover
Protections; Rights Agreement.  The Company and its board of
directors have taken all necessary action, if any, in order to render
inapplicable any control share acquisition, business combination, poison pill
(including any distribution under a rights agreement) or other similar
anti-takeover provision under the Certificate of Incorporation (as defined in
Section 3(q)) or the laws of the state of its incorporation which is or could
become applicable to any Buyer as a result of the transactions contemplated by
this Agreement, including, without limitation, the Company’s issuance of the
Securities and any Buyer’s ownership of the Securities.  The Company
and its board of directors have taken all necessary action, if any, in order to
render inapplicable any stockholder rights plan or similar arrangement relating
to accumulations of beneficial ownership of Common Stock or a change in control
of the Company.

     

    (j)           SEC Documents; Financial
Statements.  During the two (2) years prior to the date hereof,
the Company has filed all reports, schedules, forms, statements and other
documents required to be filed by it with the SEC pursuant to the reporting
requirements of the Securities Exchange Act of 1934, as amended (the “1934 Act”) (all of the
foregoing filed during the two (2) years prior to the date hereof and all
exhibits included therein and financial statements, notes and schedules thereto
and documents incorporated by reference therein being hereinafter referred to as
the “SEC
Documents”).  The Company has made available to the Buyers or
their respective representatives, through EDGAR, true, correct and complete
copies of the SEC Documents.  As of their respective filing dates, and
to the Company's knowledge, the SEC Documents complied in all material respects
with the requirements of the 1934 Act and the rules and regulations of the SEC
promulgated thereunder applicable to the SEC Documents, and did not contain any
untrue statement of a material fact or omit to state a material fact required to
be stated therein or necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not
misleading.  As of their respective filing dates, the financial
statements of the Company included in the SEC Documents complied as to form in
all material respects with applicable accounting requirements and the published
rules and regulations of the SEC with respect thereto.  Such financial
statements have been prepared in accordance with generally accepted accounting
principles, consistently applied, during the periods involved (except (i) as may
be otherwise indicated in such financial statements or the notes thereto, or
(ii) in the case of unaudited interim statements, to the extent they may exclude
footnotes or may be condensed or summary statements) and fairly present in all
material respects the financial position of the Company as of the dates thereof
and the results of its operations and cash flows for the periods then ended
(subject, in the case of unaudited statements, to normal year-end audit
adjustments).  No other information provided by or on behalf of any
officer or director of the Company to the Buyers which is not included in the
SEC Documents, including, without limitation, information referred to in Section
2(d) of this Agreement or in any disclosure schedules, contains any untrue
statement of a material fact or omits to state any material fact necessary in
order to make the statements therein, in the light of the circumstance under
which they are or were made not misleading.

     

    (k)           Absence of Certain
Changes.  Since September 30, 2007, there has been no
material adverse change and no material adverse development in the business,
properties,

     


    
      
        
           

        

         


      

      
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    operations,
condition (financial or otherwise), results of operations or prospects of the
Company or its Subsidiaries.  Since September 30, 2007, the
Company has not (i) declared or paid any dividends, (ii) sold any assets,
individually or in the aggregate, in excess of $100,000 outside of the ordinary
course of business or (iii) had capital expenditures, individually or in the
aggregate, in excess of $500,000.  Neither the Company nor any of its
Subsidiaries has taken any steps to seek protection pursuant to any bankruptcy
law nor does the Company have any knowledge or reason to believe that its
creditors intend to initiate involuntary bankruptcy proceedings or any actual
knowledge of any fact that would reasonably lead a creditor to do
so.

     

    (l)           No Undisclosed Events,
Liabilities, Developments or Circumstances.  No event,
liability, development or circumstance has occurred or exists, or is
contemplated to occur with respect to the Company, its Subsidiaries or their
respective business, properties, prospects, operations or financial condition,
that would be required to be disclosed by the Company under applicable
securities laws on a registration statement on Form S-1 filed with the SEC
relating to an issuance and sale by the Company of its Common Stock and which
has not been publicly announced.

     

    (m)           Conduct of Business;
Regulatory Permits.  Neither the Company nor any of its
Subsidiaries is in violation of any term of or in default under its Certificate
of Incorporation, any certificate of designations of any outstanding series of
preferred stock of the Company or the Bylaws or their organizational charter or
bylaws, respectively.  Neither the Company nor any of its Subsidiaries
is in violation of any judgment, decree or order or any statute, ordinance, rule
or regulation applicable to the Company or its Subsidiaries, and neither the
Company nor any of its Subsidiaries will conduct its business in violation of
any of the foregoing, except for possible violations which could not,
individually or in the aggregate, reasonably be expected to have a Material
Adverse Effect.  Without limiting the generality of the foregoing, the
Company is not in violation of any of the rules, regulations or requirements of
the Principal Market and has no knowledge of any facts or circumstances that
would reasonably lead to delisting or suspension of the Common Stock by the
Principal Market in the foreseeable future.  During the two (2) years
prior to the date hereof, (i) the Common Stock has been designated for quotation
on the Principal Market, (ii) trading in the Common Stock has not been suspended
by the SEC or the Principal Market and (iii) the Company has received no
communication, written or oral, from the SEC or the Principal Market regarding
the suspension or delisting of the Common Stock from the Principal
Market.  The Company and its Subsidiaries possess all certificates,
authorizations and permits issued by the appropriate regulatory authorities
necessary to conduct their respective businesses, except where the failure to
possess such certificates, authorizations or permits would not have,
individually or in the aggregate, a Material Adverse Effect, and neither the
Company nor any such Subsidiary has received any notice of proceedings relating
to the revocation or modification of any such certificate, authorization or
permit.

     

    (n)           Foreign Corrupt
Practices.  Neither the Company nor any of its Subsidiaries
nor, to the Company's knowledge, any of their respective current or former
directors, officers, agents, employees or other Persons acting on behalf of the
Company or any of its Subsidiaries has, in the course of its actions for, or on
behalf of, the Company or any of its Subsidiaries (i) used any corporate funds
for any unlawful contribution, gift, entertainment or other unlawful expenses
relating to political activity; (ii) made any direct or indirect
unlawful

     


    
      
        
           

        

         


      

      
        -13-

        
          

        

      

      
         


      

    


    payment
to any foreign or domestic government official or employee from corporate funds;
(iii) violated or is in violation of any provision of the U.S. Foreign Corrupt
Practices Act of 1977, as amended; or (iv) made any unlawful bribe, rebate,
payoff, influence payment, kickback or other unlawful payment to any foreign or
domestic government official or employee.

     

    (o)           Sarbanes-Oxley
Act.  The Company is in material compliance with any and all
requirements of the Sarbanes-Oxley Act of 2002 that are effective and applicable
to the Company as of the date hereof, and any and all rules and regulations
promulgated by the SEC thereunder that are effective and applicable to the
Company as of the date hereof.

     

    (p)           Transactions With
Affiliates.  Except as disclosed in the SEC Documents or as
discussed on Schedule
3(p), none of the officers, directors or employees of the Company or any
of its Subsidiaries is presently a party to any transaction with the Company or
any of its Subsidiaries (other than for ordinary course services as employees,
officers or directors), including any contract, agreement or other arrangement
providing for the furnishing of services to or by, providing for rental of real
or personal property to or from, or otherwise requiring payments to or from any
such officer, director or employee or, to the knowledge of the Company or any of
its Subsidiaries, any corporation, partnership, trust or other entity in which
any such officer, director, or employee has a substantial interest or is an
officer, director, trustee or partner.

     

    (q)           Equity
Capitalization.  As of the date hereof, the authorized capital
stock of the Company consists of 160,000,000 shares, comprised of
(x) 150,000,000 shares of Common Stock, of which as of the date hereof,
31,952,749 shares are issued and outstanding, and (y) 10,000,000 shares of
preferred stock, par value $0.01 per share, of which 600,000 shares are
designated Series B nonredeemable convertible preferred stock, of which 475,087
shares are issued and outstanding, and no other shares of the Company’s
preferred stock are issued or outstanding.  All outstanding shares of
the Company’s capital stock have been, or upon issuance will be, validly issued
and are, or upon issuance will be, fully paid and
nonassessable.  Except as described on Schedule 3(q), with
respect to any debt or equity instruments of the Company and its Subsidiaries,
(i) none of the Company’s capital stock is subject to preemptive rights or any
other similar rights or any liens or encumbrances suffered or permitted by the
Company; (ii) there are no outstanding options, warrants, scrip, rights to
subscribe to, calls or commitments of any character whatsoever relating to, or
securities or rights convertible into, or exercisable or exchangeable for, any
capital stock of the Company or any of its Subsidiaries, or contracts,
commitments, understandings or arrangements by which the Company or any of its
Subsidiaries is or may become bound to issue additional capital stock of the
Company or any of its Subsidiaries or options, warrants, scrip, rights to
subscribe to, calls or commitments of any character whatsoever relating to, or
securities or rights convertible into, or exercisable or exchangeable for, any
capital stock of the Company or any of its Subsidiaries; (iii) there are no
outstanding debt securities, notes, credit agreements, credit facilities or
other agreements, documents or instruments evidencing Indebtedness of the
Company or any of its Subsidiaries or by which the Company or any of its
Subsidiaries is or may become bound; (iv) there are no financing statements
securing obligations in any material amounts, either singly or in the aggregate,
filed in connection with the Company or any of its Subsidiaries; (v) there are
no agreements or arrangements under which the Company or any of its Subsidiaries
is obligated to

     


    
      
        
           

        

         


      

      
        -14-

        
          

        

      

      
         


      

    


    register
the sale of any of their securities under the 1933 Act; (vi) there are no
outstanding securities or instruments of the Company or any of its Subsidiaries
which contain any redemption or similar provisions, and there are no contracts,
commitments, understandings or arrangements by which the Company or any of its
Subsidiaries is or may become bound to redeem a security of the Company or any
of its Subsidiaries; (vii) there are no securities or instruments containing
anti-dilution or similar provisions that will be triggered by the issuance of
the Securities; (viii) the Company does not have any stock appreciation rights
or “phantom stock” plans or agreements or any similar plan or agreement; and
(ix) the Company and its Subsidiaries have no liabilities or obligations
required to be disclosed in the SEC Documents but not so disclosed in the SEC
Documents, other than those incurred in the ordinary course of the Company’s or
its Subsidiaries’ respective businesses and which, individually or in the
aggregate, do not or would not have a Material Adverse Effect.  The
Company has made available to the Buyers, through EDGAR, true, correct and
complete copies of the Company’s certificate of incorporation, as amended and as
in effect on the date hereof (the “Certificate of
Incorporation”), and the Company’s bylaws, as amended and as in effect on
the date hereof (the “Bylaws”).

     

    (r)           Indebtedness and Other
Contracts.  Other than the Notes to be issued pursuant to this
Agreement and except as set forth under the agreements or other arrangements
listed on Schedule
3(r), neither the Company nor any of its Subsidiaries (i) has any
outstanding Indebtedness (as defined below), (ii) is a party to any contract,
agreement or instrument, the violation of which, or default under which, by the
other party(ies) to such contract, agreement or instrument could reasonably be
expected to result in a Material Adverse Effect, (iii) is in violation of any
term of or in default under any contract, agreement or instrument relating to
any Indebtedness, except where such violations and defaults would not result,
individually or in the aggregate, in a Material Adverse Effect, or (iv) is a
party to any contract, agreement or instrument relating to any Indebtedness, the
performance of which, in the judgment of the Company’s officers, has or is
expected to have a Material Adverse Effect.  For purposes of this
Agreement:  (x) “Indebtedness” of any Person
means, without duplication (A) all indebtedness for borrowed money, (B) all
obligations issued, undertaken or assumed as the deferred purchase price of
property or services, including (without limitation) “capital leases” in
accordance with generally accepted accounting principles (other than trade
payables entered into in the ordinary course of business), (C) all reimbursement
or payment obligations with respect to letters of credit, surety bonds and other
similar instruments, (D) all obligations evidenced by notes, bonds, debentures
or similar instruments, including obligations so evidenced incurred in
connection with the acquisition of property, assets or businesses, (E) all
indebtedness created or arising under any conditional sale or other title
retention agreement, or incurred as financing, in either case with respect to
any property or assets acquired with the proceeds of such indebtedness (even
though the rights and remedies of the seller or bank under such agreement in the
event of default are limited to repossession or sale of such property), (F) all
monetary obligations in excess of $100,000 under any leasing or similar
arrangement which, in connection with generally accepted accounting principles,
consistently applied for the periods covered thereby, is classified as a capital
lease, (G) all indebtedness referred to in clauses (A) through (F) above secured
by (or for which the holder of such Indebtedness has an existing right,
contingent or otherwise, to be secured by) any mortgage, lien, pledge, charge,
security interest or other encumbrance upon or in any property or assets
(including accounts and contract rights) owned by any Person, even though the
Person which owns such assets or property has not assumed or become liable for
the

     


    
      
        
           

        

         


      

      
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    payment
of such indebtedness, and (H) all Contingent Obligations in respect of
indebtedness or obligations of others of the kinds referred to in clauses (A)
through (G) above; (y) “Contingent Obligation” means,
as to any Person, any direct or indirect liability, contingent or otherwise, of
that Person with respect to any indebtedness, lease, dividend or other
obligation of another Person if the primary purpose or intent of the Person
incurring such liability, or the primary effect thereof, is to provide assurance
to the obligee of such liability that such liability will be paid or discharged,
or that any agreements relating thereto will be complied with, or that the
holders of such liability will be protected (in whole or in part) against loss
with respect thereto; and (z) “Person” means an individual, a
limited liability company, a partnership, a joint venture, a corporation, a
trust, an unincorporated organization and a government or any department or
agency thereof.

     

    (s)           Absence of
Litigation.  There is no action, suit, proceeding, inquiry or
investigation before or by the Principal Market, any court, public board,
government agency, self-regulatory organization or body pending or, to the
knowledge of the Company, threatened against or affecting the Company or any of
its Subsidiaries, the Common Stock or any of the Company’s Subsidiaries or any
of the Company’s or its Subsidiaries’ officers or directors.

     

    (t)           Insurance.  The
Company and each of its Subsidiaries are insured by insurers of recognized
financial responsibility against such losses and risks and in such amounts as
management of the Company believes to be prudent and customary in the businesses
in which the Company and its Subsidiaries are engaged.  Neither the
Company nor any such Subsidiary has any reason to believe that it will not be
able to renew its existing insurance coverage as and when such coverage expires
or to obtain similar coverage from similar insurers as may be necessary to
continue its business at a cost that would not have a Material Adverse
Effect.

     

    (u)           Employee
Relations.

     

    (i)           Neither
the Company nor any of its Subsidiaries is a party to any collective bargaining
agreement or employs any member of a union.  The Company and its
Subsidiaries believe that their relations with their employees are
good.  No executive officer of the Company or any of its Subsidiaries
has notified the Company or any such Subsidiary that such officer intends to
leave the Company or any such Subsidiary or otherwise terminate such officer’s
employment with the Company or any such Subsidiary.  No executive
officer of the Company or any of its Subsidiaries, is, or is now expected to be,
in violation of any material term of any employment contract, confidentiality,
disclosure or proprietary information agreement, non-competition agreement, or
any other contract or agreement or any restrictive covenant, and the continued
employment of each such executive officer does not subject the Company or any of
its Subsidiaries to any liability with respect to any of the foregoing
matters.

     

    (ii)           The
Company and its Subsidiaries, to their knowledge, are in compliance with all
federal, state, local and foreign laws and regulations respecting labor,
employment and employment practices and benefits, terms and conditions of
employment and wages and hours, except where failure to be in compliance would
not, either individually or in the aggregate, reasonably be expected to result
in a Material Adverse Effect.

     


    
      
        
           

        

         


      

      
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    (v)           Title.  Except
as set forth on Schedule 3(v),
the Company and its Subsidiaries have good and marketable title in fee simple to
all real property and good and marketable title to all personal property owned
by them which is material to the business of the Company and its Subsidiaries,
in each case free and clear of all liens, encumbrances and defects  or
such as do not materially affect the value of such property and do not
materially interfere with the use made and proposed to be made of such property
by the Company and any of its Subsidiaries.  Any real property and
facilities held under lease by the Company and any of its Subsidiaries are held
by them under valid, subsisting and enforceable leases with such exceptions as
are not material and do not interfere with the use made and proposed to be made
of such property and buildings by the Company and its Subsidiaries, except (i)
as limited by applicable bankruptcy, insolvency, fraudulent transfer,
reorganization, moratorium and similar laws of general applicability, relating
to or affecting creditors’ rights generally, (ii) as limited by laws relating to
specific performance, injunctive relief or other equitable remedies, and (iii)
to the extent any indemnification provisions contained in such leases may be
limited by applicable laws.

     

    (w)           Intellectual Property
Rights.  The Company and its Subsidiaries own or possess
adequate rights or licenses to use all trademarks, service marks and all
applications and registrations therefor, trade names, patents, patent rights,
copyrights, original works of authorship, inventions, trade secrets and other
intellectual property rights (“Intellectual Property Rights”)
necessary to conduct their respective businesses as conducted on the date of
this Agreement.  None of the Company’s registered, or applied for,
Intellectual Property Rights have expired or terminated or have been abandoned,
or are expected to expire or terminate or expected to be abandoned, within three
years from the date of this Agreement.  To the knowledge of the
Company, no product or service of the Company or its Subsidiaries infringes the
Intellectual Property Rights of others.  There is no claim, action or
proceeding being made or brought, or to the knowledge of the Company or its
Subsidiaries, being threatened, against the Company or its Subsidiaries
regarding (i) its Intellectual Property Rights, or (ii) that the products or
services of the Company or its Subsidiaries infringe the Intellectual Property
Rights of others.  Neither the Company nor any of its Subsidiaries is
aware of any facts or circumstances which might give rise to any of the
foregoing infringements or claims, actions or proceedings.  The
Company and its Subsidiaries have taken reasonable security measures to protect
the secrecy, confidentiality and value of all of their Intellectual Property
Rights, except where failure to do so could not, individually or in the
aggregate, reasonably be expected to have a Material Adverse
Effect.

     

    (x)           Environmental
Laws.  The Company and its Subsidiaries, to their knowledge,
(i) are in compliance with any and all Environmental Laws (as hereinafter
defined), (ii) have received all permits, licenses or other approvals required
of them under applicable Environmental Laws to conduct their respective
businesses and (iii) are in compliance with all terms and conditions of any such
permit, license or approval where, in each of the foregoing clauses (i), (ii)
and (iii), the failure to so comply could be reasonably expected to have,
individually or in the aggregate, a Material Adverse Effect.  The term
“Environmental Laws”
means all federal, state, local or foreign laws relating to pollution or
protection of human health or the environment (including, without limitation,
ambient air, surface water, groundwater, land surface or subsurface strata),
including, without limitation, laws relating to emissions, discharges, releases
or threatened releases of chemicals, pollutants, contaminants, or toxic
or

     


    
      
        
           

        

         


      

      
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    hazardous
substances or wastes (collectively, “Hazardous Materials”) into the environment, or
otherwise relating to the manufacture, processing, distribution, use, treatment,
storage, disposal, transport or handling of Hazardous Materials, as well as all
authorizations, codes, decrees, demands or demand letters, injunctions,
judgments, licenses, notices or notice letters, orders, permits, plans or
regulations issued, entered, promulgated or approved thereunder.

     

    (y)           Tax
Status.  The Company and each of its Subsidiaries (i) has made
or filed all foreign, federal and state income and all other tax returns,
reports and declarations required by any jurisdiction to which it is subject,
(ii) has paid all taxes and other governmental assessments and charges that are
material in amount, shown or determined to be due on such returns, reports and
declarations, except those being contested in good faith and (iii) has set aside
on its books provisions reasonably adequate for the payment of all taxes for
periods subsequent to the periods to which such returns, reports or declarations
apply.  There are no unpaid taxes in any material amount claimed to be
due by the taxing authority of any jurisdiction, and the officers of the Company
know of no basis for any such claim.

     

    (z)           Internal Accounting and
Disclosure Controls.  The Company and each of its Subsidiaries
maintain a system of internal accounting controls sufficient to provide
reasonable assurance that (i) transactions are executed in accordance with
management’s general or specific authorizations, (ii) transactions are recorded
as necessary to permit preparation of financial statements in conformity with
generally accepted accounting principles and to maintain asset and liability
accountability, (iii) access to assets or incurrence of liabilities is permitted
only in accordance with management’s general or specific authorization and (iv)
the recorded accountability for assets and liabilities is compared with the
existing assets and liabilities at reasonable intervals and appropriate action
is taken with respect to any difference.  The Company maintains
disclosure controls and procedures (as such term is defined in Rule 13a-14 under
the 1934 Act) that are effective in ensuring that information required to be
disclosed by the Company in the reports that it files or submits under the 1934
Act is recorded, processed, summarized and reported, within the time periods
specified in the rules and forms of the SEC, including, without limitation,
controls and procedures designed in to ensure that information required to be
disclosed by the Company in the reports that it files or submits under the 1934
Act is accumulated and communicated to the Company’s management, including its
principal executive officer or officers and its principal financial officer or
officers, as appropriate, to allow timely decisions regarding required
disclosure.  During the twelve months prior to the date hereof neither
the Company nor any of its Subsidiaries have received any notice or
correspondence from any accountant relating to any material weakness in any part
of the system of internal accounting controls of the Company or any of its
Subsidiaries.

     

    (aa)           Ranking of
Notes.  No Indebtedness of the Company is senior to the Notes
in right of payment, whether with respect to the payment of principal,
redemptions, interest, damages or upon liquidation or dissolution or
otherwise.

     

    (bb)           Off Balance Sheet
Arrangements.  There is no transaction, arrangement, or other
relationship between the Company or any of its Subsidiaries and an
unconsolidated or other off balance sheet entity that is required to be
disclosed by the Company in its 1934 Act filings and is not so disclosed or that
otherwise would be reasonably likely to have a Material Adverse
Effect.

     


    
      
        
           

        

         


      

      
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    (cc)           Investment Company
Status.  Neither the Company nor any of its Subsidiaries is,
and upon consummation of the sale of the Securities neither the Company nor any
of its Subsidiaries will be, an “investment company,” a company controlled by an
“investment company” or an “affiliated person” of, or “promoter” or “principal
underwriter” for, an “investment company” as such terms are defined in the
Investment Company Act of 1940, as amended.

     

    (dd)           Transfer
Taxes.  On the Initial Closing Date, all stock transfer,
documentary stamp taxes or other taxes (other than income or similar taxes)
which are required to be paid in connection with the sale and transfer of the
Securities to be sold to each Buyer hereunder on the Initial Closing Date will
be, or will have been, fully paid or provided for by the Company, and all laws
imposing such taxes will be or will have been complied with.

     

    (ee)           Manipulation of
Price.  The Company has not, and to its knowledge no one acting
on its behalf has, (i) taken, directly or indirectly, any action designed to
cause or to result in the stabilization or manipulation of the price of any
security of the Company to facilitate the sale or resale of any of the
Securities, (ii) sold, bid for, purchased, or paid any compensation for
soliciting purchases of, any of the Securities, or (iii) paid or agreed to pay
to any person any compensation for soliciting another to purchase any other
securities of the Company.

     

    (ff)           Disclosure.  The
Company confirms that neither it nor any other Person acting on its behalf has
provided any of the Buyers or their agents or counsel with any information that
constitutes or could reasonably be expected to constitute material, nonpublic
information.  The Company understands and confirms that each of the
Buyers will rely on the foregoing representations in effecting transactions in
securities of the Company.  All disclosure provided to the Buyers
regarding the Company or any of its Subsidiaries, their business and the
transactions contemplated hereby, including the Schedules to this Agreement,
furnished by or on behalf of the Company is true and correct and does not
contain any untrue statement of a material fact or omit to state any material
fact necessary in order to make the statements made therein, in the light of the
circumstances under which they were made, not misleading.  Each press
release issued by the Company or any of its Subsidiaries during the twelve (12)
months preceding the date of this Agreement did not at the time of release
contain any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading.  No event or circumstance has occurred or information
exists with respect to the Company or any of its Subsidiaries or its or their
business, properties, prospects, operations or financial conditions, which,
under applicable law, rule or regulation, requires public disclosure or
announcement by the Company but which has not been so publicly announced or
disclosed.  The Company acknowledges and agrees that no Buyer makes or
has made any representations or warranties with respect to the transactions
contemplated hereby other than those specifically set forth in Section
2.

     

    (gg)           Acknowledgement Regarding
Buyers’ Trading Activity.  Anything in this Agreement or
elsewhere herein to the contrary notwithstanding, but subject to compliance by
the Buyers with applicable law and the terms of this Agreement, it is understood
and acknowledged by the Company (i) that none of the Buyers have been asked by
the Company or its Subsidiaries to agree, nor has any Buyer agreed with the
Company or its Subsidiaries, to desist from

     


    
      
        
           

        

         


      

      
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    purchasing
or selling, long and/or short, securities of the Company, or “derivative”
securities based on securities issued by the Company or to hold the Securities
for any specified term; (ii) that past or future open market or other
transactions by any Buyer, including, without limitation, short sales or
“derivative” transactions, before or after the closing of this or future private
placement transactions, may negatively impact the market price of the Company’s
publicly-traded securities; (iii) that any Buyer, and counter parties in
“derivative” transactions to which any such Buyer is a party, directly or
indirectly, presently may have a “short” position in the Common Stock, and (iv)
that each Buyer shall not be deemed to have any affiliation with or control over
any arm’s length counter-party in any “derivative” transaction.  The
Company further understands and acknowledges that (a) one or more Buyers may
engage in hedging and/or trading activities at various times during the period
that the Securities are outstanding, including, without limitation, during the
periods that the value of the Conversion Shares and the Warrant Shares
deliverable with respect to Securities are being determined and (b) such hedging
and/or trading activities (if any) could reduce the value of the existing
stockholders’ equity interests in the Company at and after the time that the
hedging and/or trading activities are being conducted.

     

    (hh)           Regulations T, U and
X.  None of the sale of the Notes and Warrants in accordance
with this Agreement, the use of the proceeds thereof and the other transactions
contemplated hereby, thereby or by the other Transaction Documents, will violate
or be inconsistent with the provisions of Regulation T, U or X of the Federal
Reserve.

     

    (ii)           Placement
Agents.  Neither the Company nor any of its subsidiaries has
engaged any placement agent or other agent in connection with the placement,
offer or sale of the Notes, Warrants or the other Securities.

     

    4.           COVENANTS.

     

    (a)           Best
Efforts.  Each party shall use its best efforts to timely
satisfy each of the conditions to be satisfied by it as provided in Sections 6
and 7 of this Agreement.

     

    (b)           Form D and Blue
Sky.  The Company agrees to file a Form D with respect to the
Securities as required under Regulation D and to provide a copy thereof to each
Buyer promptly after such filing.  The Company shall, on or before
each applicable Closing Date, take such action as the Company shall reasonably
determine is necessary in order to obtain an exemption for or to qualify the
Securities for sale to the Buyers at the applicable Closing pursuant to this
Agreement under applicable securities or “Blue Sky” laws of the states of the
United States (or to obtain an exemption from such qualification), and shall
provide evidence of any such action so taken to the Buyers on or prior to the
applicable Closing Date.  The Company shall make all filings and
reports relating to the offer and sale of the Securities required under
applicable securities or “Blue Sky” laws of the states of the United States
following each Closing Date.

     

    (c)           Reporting
Status.  Until the date on which the Buyers  shall
have sold all the Conversion Shares and Warrant Shares and none of the
Notes or Warrants
is outstanding, (the “Reporting
Period”), the Company shall timely file (or obtain extensions in respect
thereof and file within the applicable grace period) all reports required to be
filed with the SEC pursuant

     


    
      
        
           

        

         


      

      
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    to the
1934 Act.   As long as any Buyer owns Securities, if the Company
is not required to file reports pursuant to the 1934 Act, it will prepare and
furnish to the Buyers and make publicly available in accordance with Rule 144(c)
such information as is required for the Buyers to sell the Securities under Rule
144. The Company further covenants that it will take such further action as any
holder of Securities may reasonably request, to the extent required from time to
time to enable such Person to sell such Securities without registration under
the Securities Act within the requirements of the exemption provided by Rule
144, including, without limitation, causing the transfer agent for the Common
Stock to remove legends and stop transfer instructions with respect to any
Conversion Shares or Warrant Shares which may be sold under Rule 144
without regard to the availability of current financial
information.

     

    (d)           Use of
Proceeds.  The Company will use the proceeds from the sale of
the Securities for general corporate purposes, and not for (x) the
repayment of any outstanding Indebtedness of the Company or any of its
Subsidiaries at any time prior to the scheduled maturity date thereof or
(y) the redemption or repurchase of any of its or its Subsidiaries’ equity
securities other than the repurchase of equity issued to or held by employees,
officers, directors and consultants of the Company or a Subsidiary upon
termination of their employment or services with the Company or a
Subsidiary.

     

    (e)           Financial
Information.  The Company agrees to send the following to each
Buyer (or each transferee thereof as permitted by Section 2(f)) during the
Reporting Period (i) unless the following are filed with the SEC through EDGAR
and are available to the public through the EDGAR system, within one (1)
Business Day after the filing thereof with the SEC, a copy of its Annual Reports
and Quarterly Reports on Form 10-K, 10-Q , any interim reports or any
consolidated balance sheets, income statements, stockholders’ equity statements
and/or cash flow statements for any period other than annual, any Current
Reports on Form 8-K and any registration statements (other than on Form S-8) or
amendments filed pursuant to the 1933 Act, (ii) on the same day as the release
thereof, facsimile or e-mailed copies of all press releases issued by the
Company or any of its Subsidiaries, and (iii) copies of any notices and other
information made available or given to all stockholders of the Company
generally, contemporaneously with the making available or giving thereof to the
stockholders.  As used herein, “Business Day” means any day
other than Saturday, Sunday or other day on which commercial banks in The City
of New York are authorized or required by law to remain closed.

     

    (f)           Listing.  The
Company shall promptly secure the listing of all Conversion Shares and Warrant
Shares underlying the Notes and Warrants (whether issued or issuable) upon each
national securities exchange and automated quotation system, if any, upon which
the Common Stock is then listed (subject to official notice of issuance) and
shall maintain, in accordance with the Notes and Warrants, such listing of all
Conversion Shares and Warrant Shares from time to time issuable under the terms
of the Transaction Documents.  The Company shall maintain the Common
Stock’s authorization for quotation on the Principal Market.  Neither
the Company nor any of its Subsidiaries shall take any action which would be
reasonably expected to result in the delisting or suspension of the Common Stock
on the Principal Market.  The Company shall pay all fees and expenses
in connection with satisfying its obligations under this Section
4(f).

     


    
      
        
           

        

         


      

      
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    (g)           Fees.  Subject
to Section 8 below, the parties hereto shall pay their own costs and expenses in
connection herewith, except that the Company shall pay the documented,
reasonable and customary third party expenses incurred by the Buyers in
connection with the negotiation, preparation and execution of the Transaction
Documents, including the reasonable fees and expenses of one counsel to the
Buyers, which shall be Lowenstein Sandler PC.  Such expenses shall be
paid not later than, in the case of fees and expenses associated with the
Initial Closing, five (5) Business Days following the Initial
Closing.

     

    (h)           Disclosure of Transactions
and Other Material Information.  On or before 8:30 a.m., New
York City time, on the first Business Day following the date of this Agreement,
the Company shall issue a press release and file a Current Report on Form 8-K
describing the terms of the transactions contemplated by the Transaction
Documents in the form required by the 1934 Act and attaching the material
Transaction Documents (including, without limitation, this Agreement, the form
of Note and the form of Warrant) as exhibits to such filing (such filing,
including all such attachments, the “8-K Filing”).  From
and after the filing of the 8-K Filing with the SEC, no Buyer shall be in
possession of any material, nonpublic information received from the Company or
any of its Subsidiaries or any of their respective officers, directors,
employees or agents, that is not disclosed in the 8-K Filing; provided, however,
that the mere possession of such information by a director of the Company who is
affiliated with a Buyer shall not be required to be disclosed in the 8-K
Filing.  The Company shall not, and shall cause each of its
Subsidiaries and its and each of their respective officers, directors, employees
and agents, not to, provide any Buyer with any material, nonpublic information
regarding the Company or any of its Subsidiaries from and after the filing of
the 8-K Filing with the SEC without the express written consent of such
Buyer.  Subject to the foregoing, neither the Company, its
Subsidiaries nor any Buyer shall issue any press releases or any other public
statements with respect to the transactions contemplated hereby; provided,
however, that the Company shall be entitled, without the prior approval of any
Buyer, to make any press release or other public disclosure with respect to such
transactions (i) in substantial conformity with the 8-K Filing and
contemporaneously therewith and (ii) as is required by applicable law and
regulations (provided that in the case of clause (i) each Buyer shall be
consulted by the Company in connection with any such press release or other
public disclosure prior to its release).  Without the prior written
consent of any applicable Buyer, neither the Company nor any of its Subsidiaries
or affiliates shall disclose the name of such Buyer in any filing, announcement,
release or otherwise.

     

    (i)           Reservation of
Shares.  The Company shall take all action necessary to at all
times have authorized, and reserved for the purpose of issuance, a sufficient
number of shares of Common Stock for the purpose of enabling the Company to
issue the Buyers that number of shares of Common Stock issuable (i) upon
conversion of the Notes issued at the applicable Closing and (ii) upon exercise
of the Warrants issued at the applicable Closing (without taking into account
any limitations on the Conversion of the Notes or exercise of the Warrants set
forth in the Notes and Warrants, respectively).

     

    (j)           Restriction on Redemption
and Cash Dividends.  So long as any Notes are outstanding, the
Company shall not, directly or indirectly, redeem, or declare or pay any cash
dividend or distribution on, the Common Stock, or on any shares of preferred
stock of the Company (other than to (i) the extent such dividends have
already been declared or are otherwise required to be declared and paid by the
Company in cash or other securities in accordance with

     


    
      
        
           

        

         


      

      
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    the terms
thereof as of the Business Day immediately preceding the date hereof to the
extent the Buyers have been given written notice of any such terms at least one
Business Day prior to the date hereof, or (ii) the repurchase of equity
securities of the Company or any of its Subsidiaries issued to or held by
employees, officers, directors or consultants of the Company or any of its
Subsidiaries upon termination of such Person’s employment or services with the
Company or any of its Subsidiaries) without the prior express written consent of
the holders of Notes representing not less than a majority of the aggregate
principal amount of the then outstanding Notes.

     

    (k)           Fundamental
Transactions.  So long as any Buyer beneficially owns any
Securities, the Company shall not be party to any Fundamental Transaction (as
defined in the Notes) unless the Company is in compliance with the applicable
provisions governing Fundamental Transactions set forth in the Notes and the
Warrants.

     

    (l)           Conduct of
Business.  The business of the Company and its Subsidiaries
shall not be conducted in violation of any law, ordinance or regulation of any
governmental entity, except where such violations would not result, either
individually or in the aggregate, in a Material Adverse Effect.

     

    5.           REGISTER; TRANSFER AGENT
INSTRUCTIONS.

     

    (a)           Register.  The
Company shall maintain at its principal executive offices (or such other office
or agency of the Company as it may designate by notice to each holder of
Securities), a register for the Notes and the Warrants in which the Company
shall record the name and address of the Person in whose name the Notes and the Warrants have been
issued (including the name and address of each transferee), the principal amount
of Notes held by such Person, the number of Conversion Shares issuable upon
conversion of the Notes and the number of Warrant Shares issuable upon exercise
of the Warrants held by such Person.  The Company shall keep the
register open and available at all times during business hours for inspection of
any Buyer or its legal representatives, upon reasonable advance written notice
to the Company.

     

    (b)           Transfer Agent
Instructions.  The Company shall issue irrevocable instructions
to its transfer agent, American Stock Transfer and Trust Company, and any subsequent
transfer agent, to issue certificates or credit shares to the applicable balance
accounts at The Depository Trust Company (“DTC”), registered in the name
of each Buyer or its respective nominee(s), for the Conversion Shares and the
Warrant Shares issued at the Initial Closing or upon conversion of the Notes or
exercise of the Warrants in such amounts as specified from time to time by each
Buyer to the Company upon conversion of the Notes or exercise of the Warrants in
the form of Exhibit
C attached hereto (the “Irrevocable Transfer Agent
Instructions”).  The Company warrants that no instruction other
than the Irrevocable Transfer Agent Instructions referred to in this Section
5(b), and stop transfer instructions to give effect to Section 2(g) hereof, will
be given by the Company to its transfer agent, and that the Securities shall
otherwise be freely transferable on the books and records of the Company as and
to the extent provided in this Agreement and the other Transaction
Documents.  If a Buyer effects a sale, assignment or transfer of the
Securities in accordance with Section 2(f), the Company shall permit the
transfer and shall promptly instruct its transfer agent to issue one or more
certificates or credit shares to the applicable balance accounts at DTC in such
name and in such

     


    
      
        
           

        

         


      

      
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    denominations
as specified by such Buyer to effect such sale, transfer or
assignment.  In the event that such sale, assignment or transfer
involves Conversion Shares or Warrant Shares sold, assigned or transferred
pursuant to an effective registration statement or pursuant to Rule 144, the
transfer agent shall issue such Securities to the Buyer, assignee or transferee,
as the case may be, without any restrictive legend.  The Company
acknowledges that a breach by it of its obligations hereunder will cause
irreparable harm to a Buyer.  Accordingly, the Company acknowledges
that the remedy at law for a breach of its obligations under this Section 5(b)
will be inadequate and agrees, in the event of a breach or threatened breach by
the Company of the provisions of this Section 5(b), that a Buyer shall be
entitled, in addition to all other available remedies, to an order and/or
injunction restraining any breach and requiring immediate issuance and transfer,
without the necessity of showing economic loss and without any bond or other
security being required.

     

    6.           CONDITIONS TO THE COMPANY’S
OBLIGATION TO SELL.

     

    The
obligation of the Company hereunder to issue and sell the Notes and the related
Warrants to each Buyer at an applicable Closing is subject to the satisfaction,
at or before the applicable Closing Date, of each of the following conditions,
provided that these conditions are for the Company’s sole benefit and may be
waived by the Company at any time in its sole discretion by providing each Buyer
participating in such Closing with prior written notice thereof:

     

    (i)           Such
Buyer shall have executed each of the Transaction Documents to which it is a
party and delivered the same to the Company.

     

    (ii)           Such
Buyer and each other Buyer shall have delivered to the Company the applicable
Purchase Price for the Notes and the related Warrants being purchased by such
Buyer at the applicable Closing by wire transfer of immediately available funds
pursuant to the wire instructions provided by the Company.

     

    (iii)           The
representations and warranties of such Buyer shall be true and correct in all
material respects (except for those representations and warranties that are
qualified by materiality or Material Adverse Effect, which shall be true and
correct in all respects) as of the date when made and as of the applicable
Closing Date as though made at that time (except for representations and
warranties that speak as of a specific date, which shall be true and correct as
of such specified date), and such Buyer shall have performed, satisfied and
complied in all material respects with the covenants, agreements and conditions
required by this Agreement to be performed, satisfied or complied with by such
Buyer at or prior to such Closing Date.

     

    7.           CONDITIONS TO EACH BUYER’S
OBLIGATION TO PURCHASE.

     

    (a)           Conditions to the Initial
Closing.  The obligation of each Buyer hereunder to purchase
the Notes and the
related Warrants at the Initial Closing is subject to the satisfaction, at or
before the Initial Closing Date, of each of the following conditions, provided
that these conditions are for each Buyer’s sole benefit and may be waived by
such Buyer at any time in its sole discretion by providing the Company with
prior written notice thereof.

     


    
      
        
           

        

         


      

      
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    (i)           The
Company shall have duly executed and delivered to such Buyer (a) each Note
(allocated in such principal amounts as such Buyer shall request) being
purchased by such Buyer at the Initial Closing pursuant to Section 1(a) of
this Agreement, (b) the related Warrants (allocated in such amounts as such
Buyer shall request) being purchased by such Buyer at the Initial Closing
pursuant to Section 1(a) of this Agreement, and (c) each of the other
Transaction Documents to which the Company is a party and such other
certificates or instruments required to be delivered by it pursuant to the
Transaction Documents in connection with the Initial Closing.

     

    (ii)           The
Company shall have delivered to such Buyer a copy of the Irrevocable Transfer
Agent Instructions, in the form of Exhibit C
attached hereto, which instructions shall have been executed by the Company and
delivered to and acknowledged in writing by the Company’s transfer
agent.

     

    (iii)           Such
Buyer shall have received the opinion of Paul, Hastings, Janofsky & Walker
LLP, counsel to the Company, dated as of the Initial Closing Date, in
substantially the form of Exhibit D
attached hereto.

     

    (iv)           The
Company shall have delivered to such Buyer copies of (a) the Certificate of
Incorporation of the Company and (b) the certificate of incorporation of
Aeolus Sciences, Inc., each as certified by the Secretary of State of the State
of Delaware within ten (10) Business Days of the Initial Closing
Date.

     

    (v)           The
Company shall have delivered to such Buyer copies of certificates of good
standing for each of the Company and Aeolus Sciences, Inc., each as certified by
the Secretary of State of the State of Delaware within five (5) Business Days of
the Initial Closing Date.

     

    (vi)           The
Company shall have delivered to such Buyer a certificate, executed by the
Secretary of the Company and dated as of the Initial Closing Date, as to
(i) the resolutions consistent with Section 3(b) as adopted by the
Company’s board of directors in a form reasonably acceptable to such Buyer, (ii)
the Certificate of Incorporation of the Company, (iii) the certificate of
incorporation of Aeolus Sciences, Inc., (iii) the Bylaws of the Company and
(iv) the bylaws of Aeolus Sciences, Inc., each as in effect at the Initial
Closing, which certificate shall be in form and substance acceptable to the
Buyers and shall provide specimen signatures for each of the officers or
directors of the Company who execute and deliver this Agreement or any other
Transaction Document to be delivered at the Initial Closing by or on behalf of
the Company (in each case, pursuant to the authorization of the Company’s board
of directors).

     

    (vii)           The
representations and warranties of the Company shall be true and correct in all
material respects (except for those representations and warranties that are
qualified by materiality or Material Adverse Effect, which shall be true and
correct in all respects) as of the date when made and as of the Initial Closing
Date as though made at that time (except for representations and warranties that
speak as of a specific date, which shall be true and correct as of such
specified date) and the Company shall have performed, satisfied and complied in
all material respects with the covenants, agreements and conditions required by
the Transaction Documents to be performed, satisfied or complied with by the
Company at or prior

     


    
      
        
           

        

         


      

      
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    to the
Initial Closing Date.  Such Buyer shall have received a certificate,
executed by the Chief Executive Officer, President or Vice President of the
Company, dated as of the Initial Closing Date, to the foregoing effect and as to
such other matters as may be reasonably requested by such Buyer, in form and
substance acceptable to the Buyers.

     

    (viii)                      The
Common Stock (I) shall be designated for quotation or listed on the Principal
Market and (II) shall not have been suspended, as of the Initial Closing Date,
by the SEC or the Principal Market from trading on the Principal Market nor
shall suspension by the SEC or the Principal Market have been threatened, as of
the Initial Closing Date, either (A) in writing by the SEC or the Principal
Market or (B) by falling below the minimum listing maintenance requirements of
the Principal Market.

     

    (ix)           The
Company shall have obtained all governmental, regulatory or third party consents
and approvals, if any, necessary for the sale of the Securities.

     

    (x)           The
Company shall have delivered to such Buyer such other documents relating to the
transactions contemplated by this Agreement as such Buyer or its counsel may
reasonably request.

     

    (b)           Conditions to each
Subsequent Closing.  The obligation of each Buyer hereunder to
purchase Notes and
the related Warrants at each Subsequent Closing is subject to the satisfaction,
at or before the applicable Subsequent Closing Date, of each of the following
conditions, provided that these conditions are for each Buyer’s sole benefit and
may be waived by such Buyer at any time in its sole discretion by providing the
Company with prior written notice thereof.

     

    (i)           The
Company shall have complied with all of the conditions set forth in
Section 7.1(a) on or prior to the Initial Closing Date.

     

    (ii)           The
Company shall have duly executed and delivered to such Buyer (a) each Note
(allocated in such principal amounts as such Buyer shall request) being
purchased by such Buyer at such Subsequent Closing pursuant to Section 1(b)
of this Agreement, (b) the related Warrants (allocated in such amounts as such
Buyer shall request) being purchased by such Buyer at such Subsequent Closing
pursuant to Section 1(b) of this Agreement, and (c) each of the other
Transaction Documents to which the Company is a party and such other
certificates or instruments required to be delivered by it pursuant to the
Transaction Documents in connection with such Subsequent Closing.

     

    (iii)           Each
Transaction Document to be entered into as of the applicable Subsequent Closing
Date has been duly executed and delivered by the Company and constitutes, as of
such Subsequent Closing Date, the legal, valid and binding obligation of the
Company, enforceable against the Company in accordance with its terms, except
(i) as may be limited by general principles of equity or applicable bankruptcy,
insolvency, reorganization, moratorium, liquidation or similar laws relating to,
or affecting generally, the enforcement of applicable creditors’ rights
generally, (ii) as limited by laws relating to specific performance, injunctive
relief of other equitable remedies, and (iii) to the  extent the
indemnification provisions contained in this Agreement may be limited by
applicable laws.

     


    
      
        
           

        

         


      

      
        -26-

        
          

        

      

      
         


      

    


    (iv)           The
Company shall have delivered to such Buyer copies of certificates of good
standing for each of the Company and Aeolus Sciences, Inc., each as certified by
the Secretary of State of the State of Delaware within five (5) Business Days of
such Subsequent Closing Date.

     

    (v)           On
the applicable Subsequent Closing Date, all stock transfer, documentary stamp
taxes or other taxes (other than income or similar taxes) which are required to
be paid in connection with the sale and transfer of the Securities to be sold to
each Buyer hereunder on such Subsequent Closing Date will be, or will have been,
fully paid or provided for by the Company, and all laws imposing such taxes will
be or will have been complied with.

     

    (vi)           The
Company shall have timely filed (or obtained extensions in respect thereof and
filed within the applicable grace period) all reports, schedules, forms,
statements and other documents required to be filed by it with the SEC pursuant
to the 1934 Act from the date of this Agreement through the applicable
Subsequent Closing Date.

     

    (vii)           The
representations and warranties of the Company shall be true and correct in all
material respects (except for those representations and warranties that are
qualified by materiality or Material Adverse Effect, which shall be true and
correct in all respects) as of the date when made and as of such Subsequent
Closing Date as though made at that time (except for representations and
warranties that speak as of a specific date, which shall be true and correct as
of such specified date, and with respect to all other representations and
warranties, after giving effect to any updated disclosure schedules delivered by
the Company to the Buyer on such Subsequent Closing Date or as otherwise
described in any reports, schedules, forms, statements and other documents filed
by the Company with the SEC pursuant to the reporting requirements of the 1934
Act from the period commencing on the Initial Closing Date and ending on such
Subsequent Closing Date, including the exhibits included therein and financial
statements, notes and schedules thereto and documents incorporated by reference
therein; provided that such representations and warranties as so qualified by
such updated disclosure schedules or other disclosures are reasonably acceptable
to such Buyer in its sole discretion) and the Company shall have performed,
satisfied and complied in all material respects with the covenants, agreements
and conditions required by the Transaction Documents to be performed, satisfied
or complied with by the Company at or prior to such Subsequent Closing
Date.  Such Buyer shall have received a certificate, executed by the
Chief Executive Officer, President or Vice President of the Company, dated as of
such Subsequent Closing Date, to the foregoing effect, and that no default or
Event of Default (as defined in the Notes) has occurred, the conditions set
forth in this Section 7(b) have been satisfied, and as to such other
matters as may be reasonably requested by such Buyer, in form and substance
acceptable to such Buyer.

     

    (viii)                      The
Company shall have delivered to such Buyer such other documents relating to the
transactions contemplated by this Agreement as such Buyer or its counsel may
reasonably request; provided that neither Xmark Opportunity Partners, LLC nor
any “affiliate” of Xmark Opportunity Partners, LLC (as defined in Rule 144
of the 1933 Act) shall have the right under this Section 7(b)(viii) to
request that the Company deliver an opinion of counsel in connection with any
Subsequent Closing.

     


    
      
        
           

        

         


      

      
        -27-

        
          

        

      

      
         


      

    


    (c)           Conditions to each Election
Closing.  The obligation of each Buyer delivering an Election
Notice hereunder with respect to a corresponding Election Closing to purchase
Notes and the
related Warrants at such Election Closing is subject to the satisfaction, at or
before the applicable Election Closing Date, of each of the following
conditions, provided that these conditions are for each Buyer’s sole benefit and
may be waived by such Buyer at any time in its sole discretion by providing the
Company with prior written notice thereof.

     

    (i)           The
Company shall have complied with all of the conditions set forth in
Section 7.1(a) on or prior to the Initial Closing Date.

     

    (ii)           The
Company shall have delivered to such Buyer copies of certificates of good
standing for each of the Company and Aeolus Sciences, Inc., each as certified by
the Secretary of State of the State of Delaware within five (5) Business Days of
such Election Closing Date.

     

    (iii)           Each
Transaction Document to be entered into as of the applicable Election Closing
Date has been duly executed and delivered by the Company and constitutes, as of
such Election Closing Date, the legal, valid and binding obligation of the
Company, enforceable against the Company in accordance with its terms, except
(i) as may be limited by general principles of equity or applicable bankruptcy,
insolvency, reorganization, moratorium, liquidation or similar laws relating to,
or affecting generally, the enforcement of applicable creditors’ rights
generally, (ii) as limited by laws relating to specific performance, injunctive
relief of other equitable remedies, and (iii) to the  extent the
indemnification provisions contained in this Agreement may be limited by
applicable laws.

     

    (iv)           On
the applicable Election Closing Date, all stock transfer, documentary stamp
taxes or other taxes (other than income or similar taxes) which are required to
be paid in connection with the sale and transfer of the Securities to be sold to
each Buyer hereunder on such Election Closing Date will be, or will have been,
fully paid or provided for by the Company, and all laws imposing such taxes will
be or will have been complied with.

     

    (v)           The
Company shall have timely filed (or obtained extensions in respect thereof and
filed within the applicable grace period) all reports, schedules, forms,
statements and other documents required to be filed by it with the SEC pursuant
to the 1934 Act from the date of this Agreement through the applicable Election
Closing Date.

     

    (vi)           The
representations and warranties of the Company shall be true and correct in all
material respects (except for those representations and warranties that are
qualified by materiality or Material Adverse Effect, which shall be true and
correct in all respects) as of the date when made and as of such Election
Closing Date as though made at that time (except for representations and
warranties that speak as of a specific date, which shall be true and correct as
of such specified date, and with respect to all other representations and
warranties, after giving effect to any updated disclosure schedules delivered by
the Company to the Buyer on such Election Closing Date or as otherwise described
in any reports, schedules, forms, statements and other documents filed by the
Company with the SEC pursuant to the reporting requirements of the 1934 Act from
the period commencing on the Initial Closing Date and ending on such Election
Closing Date, including the exhibits included therein and financial

     


    
      
        
           

        

         


      

      
        -28-

        
          

        

      

      
         


      

    


    statements,
notes and schedules thereto and documents incorporated by reference therein;
provided that such representations and warranties as so qualified by such
updated disclosure schedules or other disclosures are reasonably acceptable to
such Buyer in its sole discretion) and the Company shall have performed,
satisfied and complied in all material respects with the covenants, agreements
and conditions required by the Transaction Documents to be performed, satisfied
or complied with by the Company at or prior to such Election Closing
Date.  Such Buyer shall have received a certificate, executed by the
Chief Executive Officer, President or Vice President of the Company, dated as of
such Election Closing Date, to the foregoing effect, and that no default or
Event of Default (as defined in the Notes) has occurred, the conditions set
forth in this Section 7(c) have been satisfied, and as to such other
matters as may be reasonably requested by such Buyer, in form and substance
acceptable to such Buyer.

     

    (vii)           The
Company shall have delivered to such Buyer such other documents relating to the
transactions contemplated by this Agreement as such Buyer or its counsel may
reasonably request.

     

    8.           TERMINATION.  In
the event that the Initial Closing shall not have occurred with respect to a
Buyer on or before five (5) Business Days from the date hereof due to the
Company’s or such Buyer’s failure to satisfy the conditions set forth in
Sections 6 and 7(a) above (and the non-breaching party’s failure to waive such
unsatisfied condition(s)), the non-breaching party shall have the option to
terminate this Agreement with respect to such breaching party at the close of
business on such date without liability of any party to any other party;
provided, however, that if this Agreement is terminated in its entirety pursuant
to this Section 8 solely as a result of the Company’s failure to satisfy the
conditions in Section 7(a) above, the Company shall remain obligated to
reimburse the non-breaching Buyers for the expenses described in
Section 4(g) above.

     

    9.           MISCELLANEOUS.

     

    (a)           Governing Law; Jurisdiction;
Jury Trial.  All questions concerning the construction,
validity, enforcement and interpretation of this Agreement shall be governed by
the internal laws of the State of New York, without giving effect to any choice
of law or conflict of law provision or rule (whether of the State of New York or
any other jurisdictions) that would cause the application of the laws of any
jurisdictions other than the State of New York.  Each party hereby
irrevocably submits to the exclusive jurisdiction of the state and federal
courts sitting in The City of New York, the borough of Manhattan, for the
adjudication of any dispute hereunder or in connection herewith or with any
transaction contemplated hereby or discussed herein, and hereby irrevocably
waives, and agrees not to assert in any suit, action or proceeding, any claim
that it is not personally subject to the jurisdiction of any such court, that
such suit, action or proceeding is brought in an inconvenient forum or that the
venue of such suit, action or proceeding is improper.  Each party
hereby irrevocably waives personal service of process and consents to process
being served in any such suit, action or proceeding by mailing a copy thereof to
such party at the address for such notices to it under this Agreement and agrees
that such service shall constitute good and sufficient service of process and
notice thereof.  Nothing contained herein shall be deemed to limit in
any way any right to serve process in any manner permitted by
law.  EACH PARTY
HEREBY IRREVOCABLY WAIVES ANY RIGHT IT MAY HAVE, AND AGREES NOT TO REQUEST, A
JURY TRIAL FOR THE

     


    
      
        
           

        

         


      

      
        -29-

        
          

        

      

      
         


      

    


    ADJUDICATION OF ANY DISPUTE HEREUNDER
OR IN CONNECTION WITH OR ARISING OUT OF THIS AGREEMENT OR ANY TRANSACTION
CONTEMPLATED HEREBY.

     

    (b)           Counterparts.  This
Agreement may be executed in two or more identical counterparts, all of which
shall be considered one and the same agreement and shall become effective when
counterparts have been signed by each party and delivered to the other party;
provided that a facsimile signature shall be considered due execution and shall
be binding upon the signatory thereto with the same force and effect as if the
signature were an original, not a facsimile signature.

     

    (c)           Headings.  The
headings of this Agreement are for convenience of reference and shall not form
part of, or affect the interpretation of, this Agreement.

     

    (d)           Severability.  If
any provision of this Agreement shall be invalid or unenforceable in any
jurisdiction, such invalidity or unenforceability shall not affect the validity
or enforceability of the remainder of this Agreement in that jurisdiction or the
validity or enforceability of any provision of this Agreement in any other
jurisdiction.

     

    (e)           Entire Agreement;
Amendments.  This Agreement and the other Transaction Documents
supersede all other prior oral or written agreements between the Buyers, the
Company, their affiliates and Persons acting on their behalf with respect to the
matters discussed herein, and this Agreement, the other Transaction Documents
and the instruments referenced herein and therein contain the entire
understanding of the parties with respect to the matters covered herein and
therein and, except as specifically set forth herein or therein, neither the
Company nor any Buyer makes any representation, warranty, covenant or
undertaking with respect to such matters.  No provision of this
Agreement may be amended other than by an instrument in writing signed by the
Company and the holders of at least two-thirds of the aggregate number of all
Conversion Shares and Warrant Shares issued and issuable under the Notes and the
Warrants, and any amendment to this Agreement made in conformity with the
provisions of this Section 9(e) shall be binding on all Buyers and holders
of Securities as applicable.  No provision hereof may be waived other
than by an instrument in writing signed by the party against whom enforcement is
sought.  No such amendment shall be effective to the extent that it
applies to less than all of the holders of the applicable Securities then
outstanding.  No consideration shall be offered or paid to any Person
to amend or consent to a waiver or modification of any provision of any of the
Transaction Documents unless the same consideration also is offered to all of
the parties to the Transaction Documents, holders of Notes or holders of the
Warrants, as the case may be.  The Company has not, directly or
indirectly, made any agreements with any Buyers relating to the terms or
conditions of the transactions contemplated by the Transaction Documents except
as set forth in the Transaction Documents.  Without limiting the
foregoing, the Company confirms that, except as set forth in this Agreement, no
Buyer has made any commitment or promise or has any other obligation to provide
any financing to the Company or any of its Subsidiaries or
otherwise.

     

    (f)           Notices.  Any
notices, consents, waivers or other communications required or permitted to be
given under the terms of this Agreement must be in writing and will be deemed to
have been delivered:  (i) upon receipt, when delivered personally;
(ii) upon receipt,

     


    
      
        
           

        

         


      

      
        -30-

        
          

        

      

      
         


      

    


    when sent
by facsimile (provided confirmation of transmission is mechanically or
electronically generated and kept on file by the sending party); or (iii) one
Business Day after deposit with an overnight courier service, in each case
properly addressed to the party to receive the same.  The addresses
and facsimile numbers for such communications shall be:

     

    If to the
Company:

     

    Aeolus
Pharmaceuticals, Inc.

    23811
Inverness Place

     

    Laguna
Niguel, California  92677

     

    Telephone:                                (949)
481-9825

     

    Facsimile:                                (949) 481-9829

     

    Attention:                                John
L. McManus, President

     

    with a
copy to:

     

    Paul,
Hastings, Janofsky & Walker LLP

    3579
Valley Centre Drive

    San
Diego, California  92130

    Telephone:                                XXXXX

    Facsimile:                                XXXXX

    Attention:                                Leigh
P. Ryan

    


    If to the
Transfer Agent:

     

    American
Stock Transfer and Trust Company

    6201 15th
Avenue

    Brooklyn,
New York 11219

    Telephone:                                (718)
921-8247

    Facsimile:                                (718)
921-8323

    Attention:                                Wilbert
Myles

    


    If to a
Buyer, to its address and facsimile number set forth on the Schedule of Buyers,
with copies to such Buyer’s representatives as set forth on the Schedule of
Buyers,

     

    with a
copy (for informational purposes only) to:

     

    Xmark
Opportunity Partners, LLC

     

    90 Grove
Street, Suite 201

     

    Ridgefield,
Connecticut  06877

     

    Telephone:                                XXXXX

     

    Facsimile:                                XXXXX

     

    Attention:                                Mitchell
D. Kaye

     

    and

     


    
      
        
           

        

         


      

      
        -31-

        
          

        

      

      
         


      

    


    Lowenstein
Sandler PC

     

    1251
Avenue of the Americas, 18th Floor

    New  York,
New York  10020

    Telephone:                                XXXXX

    Facsimile:                                XXXXX

    Attention:                                Steven
E. Siesser

    


    or to
such other address and/or facsimile number and/or to the attention of such other
Person as the recipient party has specified by written notice given to each
other party five (5) days prior to the effectiveness of such
change.  Written confirmation of receipt (A) given by the recipient of
such notice, consent, waiver or other communication, (B) mechanically or
electronically generated by the sender’s facsimile machine containing the time,
date, recipient facsimile number and an image of the first page of such
transmission or (C) provided by an overnight courier service shall be rebuttable
evidence of personal service, receipt by facsimile or receipt from an overnight
courier service in accordance with clause (i), (ii) or (iii) above,
respectively.

     

    (g)           Successors and
Assigns.  This Agreement shall be binding upon and inure to the
benefit of the parties and their respective successors and assigns, including
any purchasers of the Notes or the Warrants.  The Company shall not
assign this Agreement or any rights or obligations hereunder without the prior
written consent of the holders of at least two-thirds of the aggregate number of
Conversion Shares and Warrant Shares issued and issuable under the Notes and the
Warrants, including by way of a Fundamental Transaction (unless the Company is
in compliance with the applicable provisions governing Fundamental Transactions
set forth in the Notes and the Warrants).  Except as set forth in
Section 2(f) above with respect to the Conversion Shares and the Warrant
Shares, a Buyer may assign some or all of its rights hereunder without the
consent of the Company, in which event such assignee shall be deemed to be a
Buyer hereunder with respect to such assigned rights and shall agree to enter
into a joinder to this Agreement and become subject to the terms and conditions
of this Agreement applicable to a Buyer with respect to such rights assigned to
it.

     

    (h)           No Third Party
Beneficiaries.  This Agreement is intended for the benefit of
the parties hereto and their respective permitted successors and assigns, and is
not for the benefit of, nor may any provision hereof be enforced by, any other
Person.

     

    (i)           Survival.  Unless
this Agreement is terminated under Section 8, the representations and warranties
of the Company and the Buyers contained in Sections 2 and 3, and the agreements
and covenants set forth in Sections 4, 5 and 9 shall survive the Initial Closing
and each other Closing.  Each Buyer shall be responsible only for its
own representations, warranties, agreements and covenants
hereunder.

     

    (j)           Further
Assurances.  Each party shall do and perform, or cause to be
done and performed, all such further acts and things, and shall execute and
deliver all such other agreements, certificates, instruments and documents, as
any other party may reasonably request in order to carry out the intent and
accomplish the purposes of this Agreement and the consummation of the
transactions contemplated hereby.

     


    
      
        
           

        

         


      

      
        -32-

        
          

        

      

      
         


      

    


    (k)           Indemnification.

     

    (i)           In
consideration of each Buyer’s execution and delivery of the Transaction
Documents and acquiring the Securities thereunder and in addition to all of the
Company’s other obligations under the Transaction Documents, the Company shall
defend, protect, indemnify and hold harmless each Buyer and each other holder of
the Securities and all of their stockholders, partners, members, officers,
directors, employees and direct or indirect investors and any of the foregoing
Persons’ agents or other representatives (including, without limitation, those
retained in connection with the transactions contemplated by this Agreement)
(collectively, the “Indemnitees”) from and against
any and all actions, causes of action, suits, claims, losses, costs, penalties,
fees, liabilities and damages, and expenses in connection therewith
(irrespective of whether any such Indemnitee is a party to the action for which
indemnification hereunder is sought), and including reasonable attorneys’ fees
and disbursements (the “Indemnified Liabilities”),
incurred by any Indemnitee as a result of, or arising out of, or relating to (a)
any misrepresentation or breach of any representation or warranty made by the
Company in the Transaction Documents or any other certificate, instrument or
document contemplated hereby or thereby or (b) any breach of any covenant,
agreement or obligation of the Company contained in the Transaction Documents or
any other certificate, instrument or document contemplated hereby or
thereby.  The amount paid or payable by an Indemnitee as a result any
Indemnified Liability (or action in respect thereof) shall be deemed to include,
for purposes of this Section 9(k), any legal or other expenses reasonably
and actually incurred by such Indemnitee in connection with investigating or
defending or preparing to defend any such action or claim.

     

    (ii)           Promptly
after receipt by an Indemnitee under this Section 9(k) of notice of any
claim or the commencement of any action, such Indemnitee shall, if a claim in
respect thereof is to be made against the indemnifying party under this
Section 9(k), notify the Company in writing of the claim or the
commencement of that action; provided, however, that the failure to notify the
Company shall not relieve the Company from any liability which it may have under
this Section 9(k) except to the extent the Company, in its capacity as the
indemnifying party, has been prejudiced by such failure.  If any such
claim or action shall be brought against an Indemnitee, and it shall notify the
Company thereof, the Company shall be entitled to participate therein and, to
the extent that it wishes, to assume the defense thereof with counsel
satisfactory to such Indemnitee.  After notice from the Company to the
applicable Indemnitee of its election to assume the defense of such claim or
action, the Company shall not be liable to such Indemnitee under this
Section 9(k) for any legal or other expenses subsequently incurred by such
Indemnitee in connection with the defense thereof other than reasonable costs of
investigation.  The Company, in its capacity as indemnifying party,
shall not:

     

    (x)           without
the prior written consent of each applicable Indemnitee (which consent shall not
be unreasonably withheld, conditioned or delayed), settle or compromise or
consent to the entry of any judgment with respect to any pending or threatened
claim, action, suit or proceeding in respect of which indemnification or
contribution may be sought hereunder (whether or not such Indemnitees are actual
or potential parties to such claim or action) unless such settlement, compromise
or consent includes an unconditional release of each

     


    
      
        
           

        

         


      

      
        -33-

        
          

        

      

      
         


      

    


    such
Indemnitee from all liability arising out of such claim, action, suit or
proceeding, or

     

    (y)           be
liable for any settlement of any such action effected without its written
consent (which consent shall not be unreasonably withheld, conditioned or
delayed), but if settled with its written consent or if there be a final
judgment for the plaintiff in any such action, the Company, in its capacity as
the indemnifying party, agrees to indemnify and hold harmless each applicable
Indemnitee from and against any loss or liability by reason of such settlement
or judgment.

     

    (iii)           If
the indemnification provided for in this Section 9(k) shall for any reason be
unavailable or insufficient to hold harmless an Indemnitee in respect of any
Indemnified Liability (or action in respect thereof), the Company, in its
capacity as the indemnifying party, shall, in lieu of indemnifying such
Indemnitee, contribute to the amount paid or payable by such Indemnitee as a
result of such Indemnified Liability (or action in respect thereof), in such
proportion as is appropriate to reflect the relative fault of the Company on the
one hand and each applicable Indemnitee on the other.

     

    (l)           No Strict
Construction.  The language used in this Agreement will be
deemed to be the language chosen by the parties to express their mutual intent,
and no rules of strict construction will be applied against any
party.

     

    (m)           Remedies.  Each
Buyer and each holder of the Securities shall have all rights and remedies set
forth in the Transaction Documents and all rights and remedies which such
holders have been granted at any time under any other agreement or contract and
all of the rights which such holders have under any law.  Any Person
having any rights under any provision of this Agreement shall be entitled to
enforce such rights specifically (without posting a bond or other security), to
recover damages by reason of any breach of any provision of this Agreement and
to exercise all other rights granted by law.  Furthermore, the Company
recognizes that in the event that it fails to perform, observe, or discharge any
or all of its obligations under the Transaction Documents, any remedy at law may
prove to be inadequate relief to the Buyers.  The Company therefore
agrees that the Buyers shall be entitled to seek temporary and permanent
injunctive relief in any such case without the necessity of proving actual
damages and without posting a bond or other security.

     

    (n)           Rescission and Withdrawal
Right.  Notwithstanding anything to the contrary contained in
(and without limiting any similar provisions of) the Transaction Documents,
whenever any Buyer exercises a right, election, demand or option under a
Transaction Document and the Company does not timely perform its related
obligations within the periods therein provided, then such Buyer may rescind or
withdraw, in its sole discretion from time to time upon written notice to the
Company, any relevant notice, demand or election in whole or in part without
prejudice to its future actions and rights.

     

    (o)           Payment Set
Aside.  To the extent that the Company makes a payment or
payments to the Buyers hereunder or pursuant to any of the other Transaction
Documents or the Buyers enforce or exercise their rights hereunder or
thereunder, and such payment or payments

     


    
      
        
           

        

         


      

      
        -34-

        
          

        

      

      
         


      

    


    or the
proceeds of such enforcement or exercise or any part thereof are subsequently
invalidated, declared to be fraudulent or preferential, set aside, recovered
from, disgorged by or are required to be refunded, repaid or otherwise restored
to the Company, a trustee, receiver or any other Person under any law
(including, without limitation, any bankruptcy law, foreign, state or federal
law, common law or equitable cause of action), then to the extent of any such
restoration the obligation or part thereof originally intended to be satisfied
shall be revived and continued in full force and effect as if such payment had
not been made or such enforcement or setoff had not occurred.

     

    (p)           Independent Nature of
Buyers’ Obligations and Rights.  The obligations of each Buyer
under any Transaction Document are several and not joint with the obligations of
any other Buyer, and no Buyer shall be responsible in any way for the
performance of the obligations of any other Buyer under any Transaction
Document.  Nothing contained herein or in any other Transaction
Document, and no action taken by any Buyer pursuant hereto or thereto, shall be
deemed to constitute the Buyers as, and the Company acknowledges that the Buyers
do not so constitute, a partnership, an association, a joint venture or any
other kind of entity, or create a presumption that the Buyers are in any way
acting in concert or as a group, and the Company will not assert any such claim
with respect to such obligations or the transactions contemplated by the
Transaction Documents and the Company acknowledges that the Buyers are not
acting in concert or as a group with respect to such obligations or the
transactions contemplated by the Transaction Documents.  The Company
acknowledges and each Buyer confirms that it has independently participated in
the negotiation of the transaction contemplated hereby with the advice of its
own counsel and advisors.  Each Buyer shall be entitled to
independently protect and enforce its rights, including, without limitation, the
rights arising out of this Agreement or out of any other Transaction Documents,
and it shall not be necessary for any other Buyer to be joined as an additional
party in any proceeding for such purpose.

     

    [Signature Pages
Follow.]

     


    
      
        
           

        

         


      

      
         


        
          

        

      

      
         


      

    


    IN WITNESS WHEREOF, each Buyer
and the Company have caused their respective signature page to this Securities
Purchase Agreement to be duly executed as of the date first written
above.

     

    
      	
               
      

            	
              COMPANY:

            


    

     

    
      	
               
      

            	
              AEOLUS
      PHARMACEUTICALS, INC.

            


    

     

    
      	
               
      

            	
              By:

            	 	
              /s/ Michael P.
      McManus

            	 


    

     

    
      	
               
      

            	
              Name:

            	
              Michael
      P. McManus

            


    

     

    
      	
               
      

            	
              Title:

            	
              Chief
      Financial Officer

            


    

     


    
      
        
          Signature
Page to Securities Purchase Agreement

        

         


      

      
         


        
          

        

      

      
         


      

    


    IN WITNESS WHEREOF, each Buyer
and the Company have caused their respective signature page to this Securities
Purchase Agreement to be duly executed as of the date first written
above.

     

    
      	
               
      

            	
              BUYERS:

            


    

     

    
      	
               
      

            	
              XMARK
      OPPORTUNITY FUND, L.P.

            


    

    
      	
              By:

            	
              XMARK
      OPPORTUNITY GP, LLC, its General
Partner

            


    

    
      	
              By:

            	
              XMARK
      OPPORTUNITY PARTNERS, LLC, its Sole
Member

            


    

    
      	
              By:

            	
              XMARK
      CAPITAL PARTNERS, LLC, its Managing
Member

            


    

     

    
      	
              By:

            	
              /s/ Mitchell D.
      Kaye

            	 	 


    

     

    
      	
              Name:

            	
              Mitchell
      D. Kaye

            


    

     

    
      	
              Title:

            	
              Co-Managing
      Member

            


    

     

    
      	
               
      

            	
              XMARK
      OPPORTUNITY FUND, LTD.

            


    

    
      	
              By:

            	
              XMARK
      OPPORTUNITY MANAGER, LLC, its Investment
Manager

            


    

    
      	
              By:

            	
              XMARK
      OPPORTUNITY PARTNERS, LLC, its Sole
Member

            


    

    
      	
              By:

            	
              XMARK
      CAPITAL PARTNERS, LLC, its Managing
Member

            


    

     

    
      	
              By:

            	
              /s/ Mitchell D.
      Kaye

            	 	 


    

     

    
      	
              Name:

            	
              Mitchell
      D. Kaye

            


    

     

    
      	
              Title:

            	
              Co-Managing
      Member

            


    

     

    
      	
               
      

            	
              XMARK
      JV INVESTMENT PARTNERS, LLC

            


    

    
      	
              By:

            	
              XMARK
      OPPORTUNITY PARTNERS, LLC, its Investment
  Manager

            


    

    
      	
              By:

            	
              XMARK
      CAPITAL PARTNERS, LLC, its Managing
Member

            


    

     

    
      	
              By:

            	
              /s/ Mitchell D.
      Kaye

            	 	 


    

     

    
      	
              Name:

            	
              Mitchell
      D. Kaye

            


    

     

    
      	
              Title:

            	
              Co-Managing
      Member

            


    

     

    


     


    
      
        
          Signature
Page to Securities Purchase Agreement

        

         


      

      
         


        
          

        

      

      
         


      

    


    SCHEDULE
OF BUYERS

     

    


    
      	
              (1)

            	
              (2)

            	
              (3)

            	
              (4)

            	
              (5)

            
	
              
                Purchaser

                 

              

            	
              
                Address
      and

                Facsimile
      Number

                (Jurisdiction)

                 

              

            	
              
                Aggregate
      Principal

                Amount
      of Notes/

                Purchase
      Price

                 

              

            	
              
                Number
      of

                Warrant
      Shares

                 

              

            	
              
                Legal
      Representative’s Address and Facsimile Number

                (if
      different than in column (2))

                 

              

            
	
              Xmark
      Opportunity Fund, L.P.

            	
              c/o
      Xmark Opportunity Partners, LLC

              90
      Grove Street

              Suite
      201

              Ridgefield,
      CT  06877

              Telephone:  XXXXX

              Facsimile:  XXXXX

              Attention:  Mitchell
      D. Kaye

              (Delaware)

            	
              $150,000

            	
              300,000

            	 
      
	
              Xmark
      Opportunity Fund, Ltd.

            	
              c/o
      Xmark Opportunity Partners, LLC

              90
      Grove Street

              Suite
      201

              Ridgefield,
      CT  06877

              Telephone:  XXXXX

              Facsimile:  XXXXX

              Attention:  Mitchell
      D. Kaye

              (Cayman
      Islands)

            	
              $350,000

            	
              700,000

            	 
      
	
              Xmark
      JV Investment Partners, LLC

            	
              c/o
      Xmark Opportunity Partners, LLC

              90
      Grove Street

              Suite
      201

              Ridgefield,
      CT  06877

              Telephone:  XXXXX

              Facsimile:  XXXXX

              Attention:  Mitchell
      D. Kaye

              (Delaware)

            	
              $500,000

            	
              1,000,000

            	 
      
	
              Total

            	 
      	
              $1,000,000

            	
              2,000,000

            	 
      
	
              (1)

            	
              (2)

            	
              (3)

            	
              (4)

            	
              (5)

            


    

    



    
      
         


      

      
         


        
          

        

      

      
         


        
           

        

      

    


    


    EXHIBITS

     

    Exhibit
A                      Form
of Note

    Exhibit
B                      Form
of Warrant

    Exhibit
C                      Form
of Irrevocable Transfer Agent Instructions

    Exhibit
D                      Form
of Opinion of Company’s Counsel

    


    SCHEDULES

     

    Schedule
3(a)                                Organization
and Qualification

    Schedule
3(b)                                Authorization;
Enforcement; Validity

    Schedule
3(d)                                No
Conflicts

    Schedule
3(e)                                Consents
and Filings

    Schedule
3(k)                                Absence
of Certain Changes

    Schedule
3(p)                                Transactions
with Affiliates

    Schedule
3(q)                                Equity
Capitalization

    Schedule
3(r)                                Indebtedness
and Other Contracts

    Schedule
3(s)                                Absence
of Litigation

    Schedule
3(v)                                Title

    Schedule
3(w)                                Intellectual
Property Rights

    Schedule
3(aa)                                Ranking
of Notes

    Schedule
3(ff)                                Disclosure

    Schedule
3(ii)                                Placement
Agents


    
      
        
           

        

         


      

      
         


        
          

        

      

      
         


      

    


    


      AMENDMENT
NO. 1 TO SECURITIES PURCHASE AGREEMENT

       

      This
AMENDMENT NO. 1 TO SECURITIES
PURCHASE AGREEMENT (this “Amendment”), is being entered
into and effective as of August 4, 2008, by and among AEOLUS
PHARMACEUTICALS, INC., a Delaware corporation with its headquarters located at
23811 Inverness Place, Laguna Niguel, California  92677, as issuer
(the “Company”),
and XMARK OPPORTUNITY FUND, L.P., XMARK OPPORTUNITY FUND, LTD. and XMARK JV
INVESTMENT PARTNERS, LLC, as Buyers (as defined in the Agreement (as defined
below)) and holders of the 7% Senior Convertible Notes due 2011 of the Company
and warrants to purchase common stock of the Company issued on the Initial
Closing Date (as defined in the Agreement) (collectively, the “Investors”).

       

      WHEREAS, the parties to this
Amendment entered into that certain Securities Purchase Agreement, dated as of
August 1, 2008 (the “Agreement”);
and

       

      WHEREAS, the Company and the
Investors wish to amend the Agreement in order to change the Interest Dates (as
defined in the Form of Note attached as Exhibit A
to the Agreement) and Record Dates (as defined in the Form of Note attached as
Exhibit A
to the Agreement) for the Notes (as defined in the Agreement) to be issued at
each Subsequent Closing (as defined in the Agreement) and each Election Closing
(as defined in the Agreement).

       

      NOW, THEREFORE, the Company and each
Investor agree that the Agreement is hereby amended as
follows:

       

      1. DEFINED
TERMS.  Capitalized terms used in this Amendment but not
defined herein shall have the meanings assigned such terms in the
Agreement.

       

      2. INTEREST
AND RECORD DATES FOR NOTES ISSUED AT SUBSEQUENT AND ELECTION
CLOSINGS.  The Interest Dates for each of the Notes issued in
connection with a Subsequent Closing and an Election Closing shall be each
January 31 and July 31, commencing on January 31, 2009, and the
Record Dates for each of the Notes issued in connection with a Subsequent
Closing shall be each January 15 and July 15, immediately preceding
the applicable Interest Date.  Exhibit
A to this Amendment shall replace Exhibit
A to the Agreement with respect to Notes to be issued at each Subsequent
Closing and at each Election Closing.

       

      3. INVESTOR’S
REPRESENTATIONS AND WARRANTIES.  Each Investor, severally and
not jointly, represents and warrants to the Company that:

       

      (a) Holder
of Notes and Warrants Issued at Initial Closing.  Such Investor
is the holder of all of the Notes and Warrants issued to it at the Initial
Closing, none of which Notes or Warrants have been converted or exercised,
respectively, as of the date hereof, and none of such Investor’s (i) right,
title or interest in such Notes and Warrants or the Conversion Shares and
Warrant Shares, as the case may be, underlying such Notes and Warrants, or
(ii) rights under the Agreement, have been transferred or assigned to any
other Person as of the date hereof.

       

      
        
          -1-

        

        
          
          

          
            

          

        

        
          
          

        

      

      (b) Validity;
Enforcement.  The execution, delivery and performance by such
Investors of this Amendment have been duly and validly authorized, executed and
delivered on behalf of such Investor and shall constitute the legal, valid and
binding obligations of such Investor enforceable against such Investor in
accordance with their respective terms, except (i) as may be limited by general
principles of equity or to applicable bankruptcy, insolvency, reorganization,
moratorium, liquidation and other similar laws relating to, or affecting
generally, the enforcement of applicable creditors’ rights generally, (ii) as
limited by laws relating to specific performance, injunctive relief of other
equitable remedies, and (iii) to the extent the indemnification provisions
contained in the Agreement, as amended by this Amendment, may be limited by
applicable laws.

       

      (c) No
Conflicts.  The execution, delivery and performance by such
Investor of this Amendment and the consummation by such Investor of the
transactions contemplated hereby will not (i) result in a violation of the
organizational documents of such Investor or (ii) conflict with, or constitute a
default (or an event which with notice or lapse of time or both would become a
default) under, or give to others any rights of termination, amendment,
acceleration or cancellation of, any agreement, indenture or instrument to which
such Investor is a party, or (iii) result in a violation of any law, rule,
regulation, order, judgment  or decree (including federal and state
securities laws) applicable to such Investor, except in the case of clauses (ii)
and (iii) above, for such conflicts, defaults, rights or violations which would
not, individually or in the aggregate, reasonably be expected to have a material
adverse effect on the ability of such Investor to perform its obligations
hereunder.

       

      
        
          -2-

        

        
          
          

          
            

          

        

        
          
          

        

      

      4. REPRESENTATIONS
AND WARRANTIES OF THE COMPANY.  The Company represents and
warrants to each of the Investors that:

       

      (a) Authorization;
Enforcement; Validity.  The Company has the requisite corporate
power and authority to enter into, deliver and perform its obligations under
this Amendment.  The execution and delivery of this Amendment and the
consummation by the Company of the transactions contemplated hereby, have been
duly authorized by the Company’s board of directors, and no further filing,
consent, or authorization is required by the Company, its board of directors or
its stockholders.  This Amendment has been duly executed and delivered
by the Company and constitutes the legal, valid and binding obligations of the
Company, enforceable against the Company in accordance with their respective
terms, except (i) as may be limited by general principles of equity or
applicable bankruptcy, insolvency, reorganization, moratorium, liquidation or
similar laws relating to, or affecting generally, the enforcement of applicable
creditors’ rights generally, (ii) as limited by laws relating to specific
performance, injunctive relief of other equitable remedies, and (iii) to
the  extent the indemnification provisions contained in the Agreement,
as amended by this Amendment, may be limited by applicable
laws.

       

      (b) No
Conflicts.  The execution, delivery and performance of this
Amendment and the consummation by the Company of the transactions contemplated
hereby will not (i) result in a violation of any certificate of incorporation,
certificate of formation, any certificate of designations or other constituent
documents of the Company or any of its Subsidiaries, any capital stock of the
Company or any of its Subsidiaries or bylaws of the Company or any of its
Subsidiaries or (ii) conflict with, or constitute a default (or an event which
with notice or lapse of time or both would become a default) in any respect
under, or give to others any rights of termination, amendment, acceleration or
cancellation of, any agreement, indenture or instrument to which the Company or
any of its Subsidiaries is a party, or (iii) result in a violation of any law,
rule, regulation, order, judgment or decree (including foreign, federal and
state securities laws and regulations and the rules and regulations of the OTC
Bulletin Board) applicable to the Company or any of its Subsidiaries or by which
any property or asset of the Company or any of its Subsidiaries is bound or
affected, except in the case of clauses (ii) and (iii) above, to the extent that
such violation conflict, default or right would not reasonably be expected to
have a Material Adverse Effect.

       

      5. MISCELLANEOUS.

       

      (a) Governing
Law.  All questions concerning the construction, validity,
enforcement and interpretation of this Amendment shall be governed by the
internal laws of the State of New York, without giving effect to any choice of
law or conflict of law provision or rule (whether of the State of New York or
any other jurisdictions) that would cause the application of the laws of any
jurisdictions other than the State of New York.

       

      (b) Counterparts.  This
Amendment may be executed in two or more identical counterparts, all of which
shall be considered one and the same agreement and shall become effective when
counterparts have been signed by each party and delivered to the other party;
provided that a facsimile signature shall be considered due execution and shall
be binding upon the signatory thereto with the same force and effect as if the
signature were an original, not a facsimile signature.

       

      (c) Headings.  The
headings of this Amendment are for convenience of reference and shall not form
part of, or affect the interpretation of, this Amendment.

       

      (d) Severability.  If
any provision of this Amendment shall be invalid or unenforceable in any
jurisdiction, such invalidity or unenforceability shall not affect the validity
or enforceability of the remainder of this Amendment in that jurisdiction or the
validity or enforceability of any provision of this Amendment in any other
jurisdiction.

       

      (e) Amendments.  This
Amendment may only be amended in accordance with the terms and conditions of
Section 9(e) of the Agreement.

       

      (f) Successors
and Assigns.  This Amendment shall be binding upon and inure to
the benefit of the parties and their respective successors and assigns,
including any purchasers of the Notes or the Warrants.

       

      (g) No
Third Party Beneficiaries.  This Amendment is intended for the
benefit of the parties hereto and their respective permitted successors and
assigns, and is not for the benefit of, nor may any provision hereof be enforced
by, any other Person.

       

      [Signature Pages
Follow.]

      

        
          
            
              -3-

            

             


          

          
             


            
              

            

          

          
             


          

        



    

    IN WITNESS WHEREOF, each
Investor and the Company have caused their respective signature page to this
Amendment No. 1 to Securities Purchase Agreement to be duly executed as of the
date first written above.

     

    
      	
               
      

            	
              COMPANY:

            


    

     

    
      	
               
      

            	
              AEOLUS
      PHARMACEUTICALS, INC.

            


    

     

    
      	
               
      

            	
              By:

            	 	
              /s/ Michael P.
      McManus

            	 


    

     

    
      	
               
      

            	
              Name:

            	
              Michael
      P. McManus

            


    

     

    
      	
               
      

            	
              Title:

            	
              Chief
      Financial Officer

            


    

     


    
      
        
           

        

         


      

      
         


        
          

        

      

      
         


      

    


    IN WITNESS WHEREOF, each
Investor and the Company have caused their respective signature page to this
Amendment No. 1 to Securities Purchase Agreement to be duly executed as of the
date first written above.

     

    INVESTORS:

     

    
      	
               
      

            	
              XMARK
      OPPORTUNITY FUND, L.P.

            


    

    
      	
              By:

            	
              XMARK
      OPPORTUNITY GP, LLC, its General
Partner

            


    

    
      	
              By:

            	
              XMARK
      OPPORTUNITY PARTNERS, LLC, its Sole
Member

            


    

    
      	
              By:

            	
              XMARK
      CAPITAL PARTNERS, LLC, its Managing
Member

            


    

     

    
      	
              By:

            	
              /s/ Mitchell D.
      Kaye

            	 	 


    

     

    
      	
              Name:

            	
              Mitchell
      D. Kaye

            


    

     

    
      	
              Title:

            	
              Co-Managing
      Member

            


    

     

    
      	
               
      

            	
              XMARK
      OPPORTUNITY FUND, LTD.

            


    

    
      	
              By:

            	
              XMARK
      OPPORTUNITY MANAGER, LLC, its Investment
Manager

            


    

    
      	
              By:

            	
              XMARK
      OPPORTUNITY PARTNERS, LLC, its Sole
Member

            


    

    
      	
              By:

            	
              XMARK
      CAPITAL PARTNERS, LLC, its Managing
Member

            


    

     

    
      	
              By:

            	
              /s/ Mitchell D.
      Kaye

            	 	 


    

     

    
      	
              Name:

            	
              Mitchell
      D. Kaye

            


    

     

    
      	
              Title:

            	
              Co-Managing
      Member

            


    

     

    
      	
               
      

            	
              XMARK
      JV INVESTMENT PARTNERS, LLC

            


    

    
      	
              By:

            	
              XMARK
      OPPORTUNITY PARTNERS, LLC, its Investment
  Manager

            


    

    
      	
              By:

            	
              XMARK
      CAPITAL PARTNERS, LLC, its Managing
Member

            


    

     

    
      	
              By:

            	
              /s/ Mitchell D.
      Kaye

            	 	 


    

     

    
      	
              Name:

            	
              Mitchell
      D. Kaye

            


    

     

    
      	
              Title:

            	
              Co-Managing
      Member